Monopoly, Oligopoly, and Monopolistic Competition, Essay Example

A monopoly is a market structure in which there is only one seller of a particular good or service (Stigler). Oligopoly is a market structure in which the market for a particular good or service is dominated by a small number of sellers(Investopedia). Thus, the main difference between monopoly and oligopoly is that in monopoly a single seller controls the whole market for a particular good or service while in oligopoly there are few major players who control a major portion of the market together. Because firms in Oligopoly do have competition as opposed to monopoly, they don’t have the same pricing power that a monopoly firms has.

My family lived for a while in a small city named Farmersville in Texas where outdoor activities such as hunting and fishing were quite popular. Thus, my family also took up fishing as a hobby. During that time there was only one store in the city called Peter Fishing Mart (PFM) where you could buy fishing supplies. It was a time when the concept of internet shopping still didn’t exist, thus, the fishing enthusiasts didn’t have any other option to buy their fishing supplies except PFM. In other words, PFM operated as a monopoly. Because PFM operated as a monopoly, its prices were a little higher than what you could get in big cities like Dallas and Houston. PFM charged higher prices because it didn’t have any competition from any other store that could have put pricing pressure on it. PFM also knew that there is no substitute to the fishing supplies in Farmersville. In addition, the next closest fishing store was fifty miles outside Farmersville and thus, would not have been economical option for the customers due to the fuel costs. PFM rarely held sales events because of lack of competition and moreover, it knew that the demand for its products is relatively inelastic due to the popularity of fishing in Farmersville.

PFM was a price maker because it had control over its prices. It knew that even if it raised its prices a bit, customers would still come due to lack of options in the city. One could say that PFM had the entire fishing supplies market in Farmersville to itself because it was the only business that sold fishing supplies. PFM’s monopoly was also due to market size because even though Farmersville’s population was big enough to support a single business, it might not have been able to support two businesses. Thus, there was no incentive for anyone to get in competition with PFM since that would have meant both businesses barely covering their costs. In addition, PFM had been in business for generations and thus, had developed a loyal customer base which would also have acted as an entry barrier to anyone thinking of opening a fishing supplies store.

I have a close childhood friend who is studying at the University of Oklahoma in Norman, Oklahoma. Norman is a college town where most of the people enthusiastically follow the Oklahoma Sooners’ football games. Oklahoma Sooners are one of the top-ranked college football teams in the nation so my friend once invited me to attend a home football game. I stayed in Norman for few days and noticed that the grocery retail sector in Norman is structured as an oligopoly where the major players are Wal-Mart, Target, Homeland Stores, and Albertsons. When I visited Wal-Mart and Target in Norman, I found their prices to be quite similar to each other. This pricing behavior reflected Oligopoly market structure as the major players closely watch each other’s actions and follow quite similar pricing strategies. My friend also told me that almost all of the people in Norman go to these three, four stores for grocery shopping because they offer the best prices which is also reflective on an Oligopoly market structure. The two biggest players in Norman are Wal-Mart and Target and when you compare their offerings, you do find some different products at each store but on the most part their product offerings are quite similar. Even when they carry different brands or labels in some categories, the products are quite close substitutes to each other. When I visited a Target store in New York few months later, I noticed that the price differences between the same items at Target stores in New York and Oklahoma was much more than the price differences between Target and Wal-Mart stores in Norman. This shows that Target and Wal-Mart closely watch each other’s actions in Norman which may explain quite similar prices. In addition, there are barriers to entry in Norman’s grocery retailer market such as high start-up costs and customer loyalty which has already been secured by the few major grocery retailers.

The third marketing structure is monopolistic competition which is a combination of perfect competition and monopoly, just as the name indicates. There are a large number of sellers like perfect competition but they do have some pricing power due to branding and product differentiation. The products may be close substitutes but still have elements that differentiate themselves from the competition such as quality and consumers’ perceptions. One great example would be pizza shops in New York which along with Chicago has a reputation for one of the best pizza shops in the country. You can find pizza shops almost everywhere in New York and though most are priced in line with the competitors but some pizza shops have better reputation than others. This is why more popular pizza outlets such as Artichoke Basille’s Pizza, Di Fara Pizza, and Lombardi’s are able to charge little higher prices than the competition due to loyal customer base and reputation. But despite hundred’s of pizza outlets, it is relatively easy to setup a Pizza shop in New York which is a characteristic of a monopolistic market competition as there are low barriers to entry.

References

Investopedia. Oligopoly. 22 October 2011 <http://www.investopedia.com/terms/o/oligopoly.asp#axzz1WNm1d1ne>.

Stigler, George J. Monopoly. 22 October 2011 <http://www.econlib.org/library/Enc/Monopoly.html>.