Section 3 Monopolistic Competition and Oligopoly
Preview
Objectives
After studying this section you will be able to:
- Describe characteristics and give examples of monopolistic competition.
- Explain how firms compete without lowering prices.
- Understand how firms in a monopolistically competitive market set output.
- Describe characteristics and give examples of oligopoly.
Section Focus
Monopolistic competition is similar to perfect competition, except that companies sell slightly different goods. Oligopoly, which is closer to monopoly, describes a market with only a few large producers.
Key Terms
- monopolistic competition
- differentiation
- nonprice competition
- oligopoly
- price war
- collusion
- price fixing
- cartel
So far, you have studied the two extremes of the range of market structures: perfect competition and monopoly. Very few markets fall into either of these categories. Instead, most fall into two additional categories that economists call monopolistic competition and oligopoly.
Monopolistic Competition
In monopolistic competition, many companies compete in an open market to sell products that are similar but not identical. Each firm holds a monopoly over its own particular product. You can think of monopolistic competition as a modified version of perfect competition with minor differences in products.
The differences between perfect competition and monopolistic competition arise because monopolistically competitive firms sell goods that are similar enough to be substituted for one another but are not identical. Monopolistic competition does not involve identical commodities. An example of a monopolistically competitive market is the market for jeans. All jeans can be described as denim pants, but in the shops, buyers can choose from a variety of colors, brand names, styles, and sizes.
Unlike perfect competition, monopolistic competition is a fact of everyday life.
The market for denim jeans is monopolistically competitive because jeans can vary by size, color, style, and designer.
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