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.)

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