Question 5 (p. 233)
5 a) Explain the differences between monopolistic competition and oligopoly as market structures.
There are several key differences between a monopolistically competitive market and an oligopoly. Oligopolies consist of a few large firms which dominate the market, and have the market power but in a monopolistic competition there are many smaller firms who each have a smaller amount of market power. The barriers to entry and exit are higher in an oligopoly and because of this, abnormal profit/economic losses may only occur in oligopolies in the long run. Also, oligopolies have goods which are more differentiated compared to monopolistic competition.
b) Discuss the differences between a collusive and a non-collusive oligopoly.
In a collusive oligopoly firms decide to formally agree to limit competition and raise the price by limiting output, fixing the price, and restricting innovation, however firms are able to “cheat” to try to increase their own revenue. Cartel formation is an example of this, and it is collusion is illegal in many countries. In a non-collusive oligopoly firms have an informal collusion, and one dominating firm establishes complete leadership, but this is very difficult to actually achieve.