Monopoly vs. Oligopoly: An Overview

A monopoly and an oligopoly are economic market structures that exist when there is imperfect competition in the market. A monopoly contains a single firm that produces goods with no close substitute, while an oligopoly market has a small number of relatively large firms that produce similar, but slightly different products. In both cases, there are significant barriers to entry for other enterprises.

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

Key Takeaways

  • A monopoly occurs when one firm that produces a product or service controls the market with no close substitute.
  • In an oligopoly, two or more firms control the market without any significant influence in the industry.
  • The United States government has anti-trust laws in place to prevent monopolies from controlling the market, price gouging, and stifling consumer choices.

Monopoly

A monopoly exists in areas where one company, firm, or entity is the only—or dominant—force that sells a product or service in an industry. This gives the entity enough power to keep other competitors away from the marketplace. This may be because of the industry's requirement for technology, high capital, government regulation, patents, and/or high distribution overheads.

Once a monopoly is established, a lack of competition can lead the seller to charge consumers high prices. A monopoly also reduces the available choices for consumers. The monopoly becomes pure when there is absolutely no other substitute available in the market.

Along with high barriers to entry for competing firms, companies that operate monopolies are price makers. This means they determine the cost at which their products are sold. These prices can be changed at any time.

Monopolies are allowed to exist when they benefit the consumer. In some cases, governments may step in and create the monopoly to provide consumers with a specific services such as a railway, public transport company, or the postal service. For example, the government nationalized the United States Postal Service, allowing it to develop into a monopoly, providing daily mail service to the population.

A government can create a monopoly by nationalizing a product or service such as the postal service.

Oligopoly

In an oligopoly, a group of smaller firms—usually two or more—controls the market. However, none of them can keep the others from having significant influence in the industry, and they may sell products that are slightly different.

Prices in this market are moderate because of the presence of competition. When one firm sets a price, the others will do the same to remain competitive. But if one firm drops its price for consumers, the others 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, firms may collude with one another rather than compete, which can keep other players from entering the marketplace. If they don't collude, they would be forced to open up the market to smaller firms. This cooperation makes them operate as though they were one firm. Because there must be some degree of competition in an oligopoly, this changes the market structure to a monopoly.

Collusion by an oligopoly occurred in the U.S. publishing market. In 2012, the Department of Justice sued six major book publishers for price-fixing electronic books. In a free market, price fixing—even without judicial intervention—is unsustainable. If one company undermines its competition, others are forced to quickly follow. Firms 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

Unless it can be proven that a company tries to restrain trade, both oligopolies and monopolies are legal in the United States.

Because of the lack of competition, companies can fix prices and create product scarcities which can lead to corruption, inferior products and services, and high costs for consumers. When this happens, the government generally steps in. Anti-trust laws are in place to penalize companies that operate monopolies and oligopolies. These laws are in place to protect consumers, to maintain competition within the market, and to prevent companies from price gouging. Companies may be forced to pay hefty fines and/or break up into smaller entities.

In 2018, the government stepped in to block AT&T's merger with Time Warner, saying the merged company could feasibly block competition by forcing other companies to raise their costs. This, in turn, would hurt the market and reduce the number of choices available to consumers.

For an oligopoly to be found illegal, one or more firms must demonstrate the intent to corner a market using anti-competitive practices. Collusion is the most typical infraction to lead to anti-trust proceedings. This is different from circumstances in which companies that have unintentionally come to dominate an industry via a better product or service, superior business practices, or 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. Some of these monopolies are actually protected by law. For example, pharmaceutical companies in the U.S. are granted monopolies on new drugs for 20 years. This is necessary due to the time and capital required to develop and bring new drugs to market. Without the benefits of this status, firms would not be able to realize returns on their investments, and potentially beneficial research would be stifled. Similarly, utilities like gas and electric companies are also granted monopolies. These, however, are heavily regulated by the government. Their rates are controlled, along with any rate increases the company may pass on to consumers.

Oligopolies exist throughout the world, and are common in specific markets. Entertainment is a big place where oligopolies exist. This includes mass media, where a handful of companies control the market. Some of the big names include Disney, Viacom, CBS, and NBC Universal. Another area of the entertainment world is the music business, where Sony, BMG, and Universal all have a big grip on the market. Airlines also form oligopolies, where a small number of players float over the rest, keeping other competitors at bay.