Monopoly vs. Oligopoly: An Overview

A monopoly and an oligopoly are market structures that exist when there is imperfect competition. A monopoly is when a single company produces goods with no close substitute, while an oligopoly is when a small number of relatively large companies produce similar, but slightly different goods. In both cases, significant barriers to entry prevent other enterprises from competing.

A market's geographical size can determine which structure exists. One company might control an industry in a particular area with no other alternatives, though a few similar companies operate elsewhere in the country. In this case, a company may be a monopoly in one region, but operate in an oligopoly market in a larger geographical area.

Key Takeaways

  • A monopoly occurs when a single company that produces a product or service controls the market with no close substitute.
  • In an oligopoly, two or more companies control the market, none of which can keep the others from having significant influence. 
  • Anti-trust laws prevent companies from engaging in unreasonable restraint of trade and transacting mergers that lessen competition.

Monopoly

A monopoly exists in areas where one company is the only or dominant force to sell a product or service in an industry. This gives the company enough power to keep competitors away from the marketplace. This could be due to high barriers to entry such as technology, steep capital requirements, government regulation, patents or high distribution costs.

Once a monopoly is established, lack of competition can lead the seller to charge high prices. Monopolies are price makers. This means they determine the cost at which their products are sold. These prices can be changed at any time. A monopoly also reduces available choices for buyers. The monopoly becomes a pure monopoly when there is absolutely no other substitute available.

Monopolies are allowed to exist when they benefit the consumer. In some cases, governments may step in and create the monopoly to provide specific services such as a railway, public transport or postal services. For example, the United States Postal Service enjoys a monopoly on first class mail and advertising mail, along with monopoly access to mailboxes.

The United States Postal Service enjoys a monopoly on letter carrying and access to mailboxes that is protected by the Constitution.

Oligopoly

In an oligopoly, a group of companies (usually two or more) controls the market. However, no single company can keep the others from wielding significant influence over the industry, and they each may sell products that are slightly different.

Prices in this market are moderate because of the presence of competition. When one company sets a price, others will respond in fashion to remain competitive. For example, if one company cuts prices, other players typically follow suit. Prices are usually higher in an oligopoly than they would be in perfect competition.

Because there is no dominant force in the industry, companies may be tempted to collude with one another rather than compete, which keeps non-established players from entering the market. This cooperation makes them operate as though they were a single company.

In 2012, the U.S. Department of Justice alleged that Apple (AAPL) and five book publishers had engaged in collusion and price fixing for e-books. The department alleged that Apple and the publishers conspired to raise the price for e-book downloads from $9.99 to $14.99. A U.S. District Court sided with the government, a decision which was upheld on appeal.

In a free market, price fixing—even without judicial intervention—is unsustainable. If one company undermines its competition, others are forced to quickly follow. Companies that lower prices to the point where they are not profitable are unable to remain in business for long. Because of this, members of oligopolies tend to compete in terms of image and quality rather than price.

Legalities of Monopolies vs. Oligopolies

Oligopolies and monopolies can operate unencumbered in the United States unless they violate anti-trust laws. These laws cover unreasonable restraint of trade; plainly harmful acts such as price fixing, dividing markets and bid rigging; and mergers and acquisitions (M&A) that substantially lessen competition.

Without competition, companies have the power to fix prices and create product scarcity, which can lead to inferior products and services and higher costs for buyers. Anti-trust laws are in place to ensure a level playing field.

In 2017, the U.S. Department of Justice filed a civil antitrust suit to block AT&T's merger with Time Warner, arguing the acquisition would substantially lessen competition and lead to higher prices for television programming. However, a U.S. District Court judge disagreed with the government's argument and approved the merger, a decision that was upheld on appeal.

The government has several tools to fight monopolistic behavior. This includes the Sherman Antitrust Act, which prohibits unreasonable restraint of trade, and the Clayton Antitrust Act, which prohibits mergers that lessen competition and requires large companies that plan to merge to seek approval in advance. Anti-trust laws do not sanction companies that achieve monopoly status via offering a better product or service, or though uncontrollable developments such as a key competitor leaving the market.

Examples of Monopolies and Oligopolies

A company with a new or innovative product or service enjoys a monopoly until competitors emerge. Sometimes these new products are protected by law. For example, pharmaceutical companies in the U.S. are granted 20 years of exclusivity on new drugs. This is necessary due to the time and capital required to develop and bring new drugs to market. Without this protected status, firms would not be able to realize a return on their investment, and potentially beneficial research would be stifled.

Gas and electric utilities are also granted monopolies. However, these utilities are heavily regulated by state public utility commissions. Rates are often controlled, along with any rate increases the company may pass onto consumers.

Oligopolies exist throughout the business world. A handful of companies control the market for mass media and entertainment. Some of the big names include The Walt Disney Company (DIS), ViacomCBS (VIAC) and Comcast (CMCSA). In the music business, Universal Music Group, Sony Entertainment and Warner Music Group all have a tight grip on the market.