Explain with relevant examples the main differences between oligopolistic and monopolistic competition. [10]

Explain with relevant examples the main differences between oligopolistic and monopolistic competition. [10] 

Tutor's Note: This is an Economics question modified and simplified from an actual “A” levels Economics examination.

This paper explains with relevant examples the main differences between oligopolistic and monopolistic competition. 

What is Oligopoly?

What is oligopoly? Oligopoly refers to a market where the barriers to entry are high, such that there exist only a few large firms in that particular industry, each with a significant market share, selling either homogeneous or differentiated products. Homogenous products are products that are perfectly substitutable for each other and have little or no product differentiation, unlike differentiated products. 

What is Monopolistic Competition?

What is monopolistic competition? Monopolistic competition, on the other hand, refers to a market where the barriers to entry are low, such that there exist many firms, each with insignificant market share, selling somewhat differentiated products. This paper deals with the characteristics first and then the nature of the products sold, and then finally the performance of the two market structures. 

Barriers to Entry for Oligopoly and MC Firms

Let us examine the characteristics of the two market structures of oligopoly and monopolistic competition. First let us deal with the barriers to entry. There are high barriers for oligopoly, for instance large economies of scale (internal EOS) in the provision of telecommunications services, whereas there are low barriers for monopolistic competition, for instance low economies of scale (internal EOS) in the clothes retails.   

Homogeneous vs Differentiated Products

Next, let us deal with the nature of the product. A product is homogenous when, for instance, every seller sells exactly the same item, for instance, petrol for cars of a certain particular grade such as 95 or 98 octane, whereas on the other hand a product is differentiated when the product sold by a firm is similar, but not exactly identical to that of its competitor’s product, be it "psychologically" or physically different, for instance, branded cars or cars of different makes and styles. 

Monopolistic competitive firms sell differentiated products, and hence as such derive their pricing power from their product differentiation, whether it is merely psychologically perceived or actually substantially differentiated. 

Oligopolies, on the other hand, can sell either differentiated or homogenous products, and their source of market power comes instead from their large market share arising from the few players that exist within that industry, and their huge economies of scale.

Profits

Let us now examine the performance of the market structures. What kind of profits would these firms earn? In the long run, only normal profits exist in monopolistic competition, while supernormal profits exist for oligopolies, so monopolistic competition is likely to be more equitable compared to oligopoly, which seems more inequitable.

Efficiencies

In terms of efficiency, there are many arguments to make to show the differences. 

First, an oligopoly may be X-inefficient – meaning that it does not work energetically to cut costs – but monopolistic competition is X-efficient as well. 

Both market structures are allocatively inefficient, where allocative efficiency refers here to P = MC, but the extent is likely much greater for oligopoly, because the price will be much higher than marginal cost for an oligopoly compared to monopolistic competition, which also has P > MC, but not by that much. 

In terms of dynamic efficiency, oligopoly generates more research and development (R&D) than monopolistic competition, and as such is more dynamic efficient because it has the willingness and ability to innovate.   

JC Economics Essays: Tutor's Comments - This Economics paper is short, sharp, sweet, and to the point, and was contributed by a hardworking, dedicated student who composed it under model examination conditions. This Economics essay is also quite well organised and structured, and structured essays are very well received by Economics examiners and teachers. Certainly, we can all learn from it, not just content knowledge but also how to craft to-the-point essays. However, there are a few possible criticisms/ issues: one, the student has not consistently used examples throughout the Economics paper (in particular, "relevant examples") to illustrate his points; two, the student could be more accurate and specific in his introduction by telling the reader, examiner, or Economics tutor reading his paper EXACTLY what he is going to do and say in the paper; three, there is no conclusion, probably because he ran out of time writing; four, he could have defined his terms better and clearer, and more consistently too. Maybe the paragraphing could be slightly better as well, and arguments could be grouped together. Having said that, this Economics essay is still good and in fact the criticisms made would not hurt it very much, because overall it is well written and in examination conditions this precision and clear economic analysis is recognised, valued, and appreciated - although it could have been further improved. Thanks for reading and cheers.