Economics Basics: Monopolies, Oligopolies and Perfect Competition
  1. Economics Basics: Introduction
  2. Economics Basics: What Is Economics?
  3. Economics Basics: Production Possibility Frontier, Growth, Opportunity Cost and Trade
  4. Economics Basics: Supply and Demand
  5. Economics Basics: Elasticity
  6. Economics Basics: Utility
  7. Economics Basics: Monopolies, Oligopolies and Perfect Competition
  8. Economics Basics: Conclusion

Economics Basics: Monopolies, Oligopolies and Perfect Competition

Economists assume that there are a number of different buyers and sellers in the marketplace. This means that we have competition in the market, which allows price to change in response to changes in supply and demand. Furthermore, for almost every product there are substitutes, so if one product becomes too expensive, a buyer can choose a cheaper substitute instead. In a market with many buyers and sellers, both the consumer and the supplier have equal ability to influence price.

In some industries, there are no substitutes and there is no competition. In a market that has only one or few suppliers of a good or service, the producer(s) can control price, meaning that a consumer does not have choice, cannot maximize his or her total utility and has have very little influence over the price of goods.

A monopoly is a market structure in which there is only one producer/seller for a product. In other words, the single business is the industry. Entry into such a market is restricted due to high costs or other impediments, which may be economic, social or political. For instance, a government can create a monopoly over an industry that it wants to control, such as electricity. Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one entity has the exclusive rights to a natural resource. For example, in Saudi Arabia the government has sole control over the oil industry. A monopoly may also form when a company has a copyright or patent that prevents others from entering the market. Pfizer, for instance, had a patent on Viagra.

In an oligopoly, there are only a few firms that make up an industry. This select group of firms has control over the price and, like a monopoly, an oligopoly has high barriers to entry. The products that the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces. Assume, for example, that an economy needs only 100 widgets. Company X produces 50 widgets and its competitor, Company Y, produces the other 50. The prices of the two brands will be interdependent and, therefore, similar. So, if Company X starts selling the widgets at a lower price, it will get a greater market share, thereby forcing Company Y to lower its prices as well.

There are two extreme forms of market structure: monopoly and, its opposite, perfect competition. Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand. Thus, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any leverage. For example, in a perfectly competitive market, should a single firm decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits.

Economics Basics: Conclusion

  1. Economics Basics: Introduction
  2. Economics Basics: What Is Economics?
  3. Economics Basics: Production Possibility Frontier, Growth, Opportunity Cost and Trade
  4. Economics Basics: Supply and Demand
  5. Economics Basics: Elasticity
  6. Economics Basics: Utility
  7. Economics Basics: Monopolies, Oligopolies and Perfect Competition
  8. Economics Basics: Conclusion
RELATED TERMS
  1. Perfect Competition

    A market structure in which the following five criteria are met: ...
  2. Monopoly

    A situation in which a single company or group owns all or nearly ...
  3. Imperfect Competition

    A type of market that does not operate under the rigid rules ...
  4. Price Maker

    A monopoly or a firm within monopolistic competition that has ...
  5. Monopolistic Competition

    Characterizes an industry in which many firms market products ...
  6. Natural Monopoly

    A type of monopoly that exists as a result of the high fixed ...
RELATED FAQS
  1. What are the major differences between a monopoly and an oligopoly?

    The major differences between a monopoly and an oligopoly include the number of firms in the market, type of barriers to ... Read Answer >>
  2. What factors influence competition in microeconomics?

    Find out what influences competition in microeconomics and how perfect competition, monopoly and oligopoly vary in their ... Read Answer >>
  3. What is the difference between perfect and imperfect competition?

    Learn the differences between perfect competition and imperfect competition and what types of markets are considered imperfectly ... Read Answer >>
  4. What parameters are required for a market to exhibit perfect competition?

    Learn what parameters are required for a market to exhibit perfect competition and how perfect competition is more of a theory ... Read Answer >>
  5. What are the characteristics of a monopolistic market?

    Learn about monopolistic markets and specific descriptions of the main characteristics that distinguish a monopolistic market ... Read Answer >>
  6. Why are monopolistic markets inefficient?

    Find out why general equilibrium economic models suggest monopolistic markets can lead to inefficiencies and why some economists ... Read Answer >>

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