This document provides an overview of monopolistic competition and oligopoly market structures. It discusses that under monopolistic competition, there are many small firms producing differentiated products with easy entry and exit into the industry. Each firm operates where marginal revenue equals marginal cost and charges the highest price consistent with that output level. In the long-run, profits are driven to zero due to new competition. The document then contrasts oligopoly, where a few large firms produce either homogeneous or differentiated products and face significant barriers to entry.

1. Annu S Pant
Visiting Faculty of Economics
Kathmandu University
2010

2. In This Lecture…
 Monopolistic
Competition – Pricing and
Production Decision in
Short Run and in Long
Run
 Oligopolistic
Competition – Features
and distinction from
Monopolistic
Competition

3. Monopolistic Competition
The theory of monopolistic competition is
built on three assumptions:
 There are many sellers and buyers.
 Each firm in the industry produces and
sells a slightly differentiated product.
 There is easy entry and exit.

4. Monopolistic Competition
 The monopolistic competitor is a price
searcher.
 For the monopolistic competitor, P > MR,
and the marginal revenue curve lies below
the demand curve.
 The monopolistic competitor produces the
quantity of output at which MR =MC.
 It charges the highest price per unit for
this output.

5. Monopolistic Competitive Firm’s
Output and Price (short-run)
 The monopolistic
competitor produces
that quantity of output
for which MR = MC at
q1.
 It charges the highest
price consistent with
this quantity, which is
P1.

6. The Monopolistic Competitive Firm’s
Long-run Equilibrium Output and Price
 Unlike the perfectly competitive firm, the
monopolistic competitor does not exhibit
resource allocative efficiency.
 Unlike the monopoly firm, the monopolistic
competitive firm cannot earn profits in the
long run (because of easy entry into the
industry) unless it can successfully
differentiate its product (e.g., by brand
name) in the minds of buyers.

7. The Monopolistic Competitive Firm’s
Long-run Equilibrium Output and Price
Because of easy entry
into the industry,
there are likely to be
zero economic profits
in the long run for a
monopolistic
competitor. In other
words, P = ATC.

8. Oligopoly
A theory of market structure based on three
assumptions:
 There are few sellers and many buyers.
 Firms produce and sell either
homogeneous or differentiated products.
 There are significant barriers to entry.

9. Oligopolist
 The oligopolist is a price searcher.
 It produces the quantity of output at
which MR = MC.

10. Types of Oligopoly
 Perfect or Imperfect Oligopoly
 Non-collusive or Collusive Oligopoly
 Duopoly

11. Types of Oligopoly
 Perfect or Imperfect Oligopoly
If in an Oligopoly market, the firms
produce homogeneous products it is
called perfect oligopoly.
If the firms produce differentiated
products, it is called imperfect oligopoly.

12. Types of Oligopoly
 Non-collusive or Collusive Oligopoly
If in an oligopoly market firms compete
with each other it is called non-collusive
oligopoly market or non-cooperative
oligopoly market.
If the firms cooperate with each other in
determining price or output or both, it is
called collusive oligopoly or cooperative
oligopoly.

13. Types of Oligopoly
 Duopoly
When there are only two firms producing
a product, it is called duopoly. It is a
special case of oligopoly.

14. Oligopoly vs Monopolistic
Competition
 Number of buyers and sellers
In an oligopoly market, there are few
sellers but large number of buyers.
In monopolistic competition, there are
large number of buyers and sellers.

15. Oligopoly vs Monopolistic
Competition
 Nature of Product
In oligopoly market, the product may
be homogenous or differentiated.
In monopolistic market, the products
are differentiated.
 Entry/ exit of firms
In oligopoly market, the entry and exit
of firms are restricted while in
monopolistic market it is not.