A:

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

The geographical size of the market can determine whether there is an oligopoly or a monopoly. A firm may dominate an industry in a particular area where there are no alternatives to the same product but have two or three similar companies operating nationwide. Thus, the firm may be a monopoly in a region but operate in an oligopoly market in a larger geographical area.

Pricing and Barriers to Entry

In a monopoly, the seller can charge high prices for the goods because there is no competition. In an oligopoly, the prices are moderate due to the presence of competition. However, they are higher than they would be in perfect competition.

Barriers to entry in a monopoly market are high due to technology, high capital requirement, government regulation, patents and/or high distribution overheads. In an oligopoly market, the barriers to entry are high due to the economies of scale.

Collusion in Oligopolies

A monopoly draws power from the fact that it is the only viable seller of the product in the industry. There are very few true monopolies in the U.S. However, there are oligopolies, and in an oligopoly, firms can influence the market by setting their prices, marketing strategies, and customer service.

In an oligopoly, firms may collude rather than compete. The cooperation makes them operate as though they were one firm. This changes the market structure from being an oligopoly to a monopoly. There must be some measure of competition in an oligopoly market structure. 

A prominent example of 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. (For related reading, see: What are the most famous cases of oligopolies?)

Are They Legal?

Unless it can be proven that a company has attempted to restrain trade, both oligopolies and monopolies are legal in the United States. In an oligopoly, collusion is the most typical infraction to lead to anti-trust proceedings. For an oligopoly to be found illegal, one or more firms must demonstrate intent to corner a market using anti-competitive practices. 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.

Any company with a new or innovative product or service enjoys a monopoly until competitors emerge. Some of these monopolies are actually protected by law. Pharmaceutical companies in the U.S. are essentially 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.

(For related reading, see: How and Why Companies Become Monopolies.)

RELATED FAQS
  1. What are some current examples of oligopolies?

    An oligopoly consists of a select few companies having significant influence over an industry. Industries like oil & gas, ... Read Answer >>
  2. What are the most famous cases of oligopolies?

    Learn about famous examples of oligopolies currently in place in the United States, Canada and worldwide. Explore imperfect ... Read Answer >>
  3. How does a monopoly contribute to market failure?

    Read a simple overview of the theory of market monopoly, where it originated and some contemporary challenges to the classical ... Read Answer >>
  4. 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 >>
  5. What are the characteristics of a monopolistic market?

    Learn about monopolistic markets and the main characteristics that distinguish from other markets and whether or not they ... Read Answer >>
  6. Are there any legal monopolies in America or Europe?

    Legal monopolies continue to exist in the United States and Europe despite the current trend against their recognition and ... Read Answer >>
Related Articles
  1. Investing

    New Monopoly Edition Ditches Paper Money (HAS)

    Hasbro's latest version of Monopoly speeds up the classic game and reflects our movement towards a cashless society. It will still probably end friendships over the "free parking" rule, though.
  2. Taxes

    Why Monopoly Is A Terrible Finance Teacher

    With its plethora of inaccuracies, Monopoly doesn't offer the best lessons in real-world finance.
  3. Trading

    Is Google Becoming A Monopoly?

    Learn about whether Google is becoming a monopoly. Monopolies are considered undesirable because they prevent competition and innovation.
  4. Investing

    Hasbro's Monopoly Revamps 1930s Game Pieces

    Hasbro's new Monopoly Token Madness Campaign introduces hashtags, emojis as replacements.
  5. Insights

    A Short History of the US Federal Trade Commission

    Since the early 1900s, the Federal Trade Commission has preventing anticompetitive, deceptive, and unfair business practices.
  6. Small Business

    What are antitrust laws?

    Learn about antitrust laws or "competition laws." These statutes protect consumers from predatory business practices by ensuring fair competition exists.
  7. Investing

    It's Not Illegal If The Government Does It

    The government allows itself the leeway to do many things that would be illegal for a private citizen or corporation.
  8. Investing

    Consumer Stocks Struggle Under Various Pressures

    With more competition from Walmart and Amazon, consumer staples stocks are sinking this year.
RELATED TERMS
  1. Oligopoly

    Oligopoly is a market structure with a small number of firms, ...
  2. Natural Monopoly

    A natural monopoly is the domination of an industry or sector ...
  3. Duopoly

    A duopoly is a situation where two companies own all or nearly ...
  4. Monopoly

    A monopoly is a situation in which one corporation, firm or entity ...
  5. Legal Monopoly

    A legal monopoly is a company that is operating as a monopoly ...
  6. Monopolist

    A monopolist is an individual, group or company that controls ...
Hot Definitions
  1. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  2. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  3. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
  4. Financial Risk

    Financial risk is the possibility that shareholders will lose money when investing in a company if its cash flow fails to ...
  5. Enterprise Value (EV)

    Enterprise Value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market ...
  6. Relative Strength Index - RSI

    Relative Strength Indicator (RSI) is a technical momentum indicator that compares the magnitude of recent gains to recent ...
Trading Center