Monopolistic competition as well as oligopoly is the market structure that combines some characteristics of perfect competition market structure and some characteristics of monopoly. The best example of the market with monopolistic competition is the market of cafés with alcoholic-free beverages’ offer. Here could be mentioned a well-known player Starbucks Coffee Company. In its most general term monopolistic competition is the market where a great enough number of suppliers sell a differentiated product.
In contrast with monopolistic competition, oligopoly is the market structure with a few suppliers dominant on the market and strong barriers for entering the market. In this particular case, there will be analyzed American automotive industry as the example of oligopoly market structure. By the way, a dominant power of automotive industry of the USA is the Big Three. The Big Three is unofficial common name of American producers General Motors, Ford and Chrysler (Train, Winston, 2006).
To start with, it is necessary to summarize the main similarities and differences of both monopolistic competition market structure and oligopoly. These lies in such spheres as determining pricing and output, market power, price elasticity of demand, revenues and cost structures. As regards similarities between these two market structures, they include the following:
Firstly, companies operating on both markets offer similar products. The firms out of both market structures are familiar with the term product differentiation. This term presumes the emphasizing the differences between two products. According to this process, a company makes its product more attractive for customers in the way that it contrasts unique qualities of this product with other competing products. For example, Starbucks as the representative of monopolistic competition differentiates its beverages due to putting the emphasis on their quality. According to mission statement of the company, Starbucks is passionate about ethically sourcing the finest coffee beans. Furthermore, the company also differentiates its services via the creation of the sense of belonging among customers. It tries to make shops’ visitors feel a break from the worries outdoors. As regards the Big Three and American automotive industry in general, the companies also differentiate their cars. Take for instance Chevrolet Volt produced by GM. Product differentiation in this case presumes emphasizing the environmentally-friendliness of this car.
The second common feature of to market structures is non-price competition. In terms of Starbucks, for example, the advertisement plays a very important role, as it is the most effective way of product differentiation. The situation with American automotive industry is similar.
If to speak about differences between monopolistic competition and oligopoly, it is important to think about three crucial points. Firstly, there is a difference in a number of firms operating on the market. There exist many suppliers in monopolistic competition market structure, while in oligopoly only a few companies, usually from 2 to 10, output a certain product. Therefore, automotive industry of the USA consists of three native producers, the Big Three. Moreover, a number of international producers established their own plants in the USA to avoid high duty on the import of cars produced abroad. Simultaneously, Starbucks Coffee Company operates on a very competitive market. There exist thousands of rivals.
Secondly, market structures have different market entry conditions. As regards monopolistic competition market structure, there are almost no barriers for market entrance, since sufficient obstacles for firms’ establishments as well as their liquidations just do not exist. Opposite to cafes and beverages market, automotive industry market demands huge investments. Investors have to invest hundreds of millions dollars just to build a plant. Therefore, in oligopoly market structure there exist huge barriers and, in general, it is very difficult to enter the market for a new producer.
Finally, the difference between two market structures lies in pricing control. Truly, pricing control on cafes and beverages market is restricted. This means, in long run period there is no pricing control at all. In short run period pricing control is implemented according to the same principle as within monopoly market structure though. In terms of car production industry, the pricing control on the market is obvious and typical.
In addition, a very important factor that defines the behavior of a company on various market structures is price elasticity of demand. First of all, price elasticity of demand depends on three factors. These are the following: the level of product differentiation, a number of producers and the synchronization of change of prices by producers.
The common feature of monopolistic competition and oligopoly market structures is that both of their price elasticity of demand curves are downward. This means the following: the higher price is, the fewer customers are ready to buy a product and vice versa. However, there exists the difference in the inclinations of curves. The angle of price elasticity of demand for oligopoly is bigger than the one for monopolistic competition. This means that the demand for coffee in Starbucks coffee shop, for instance, is more price-elastic than the demand for a car.
Last, but by no means least, there is the difference between two market structures in revenues and cost structures. However, it is necessary to take into account that revenues and cost varies not only within various market structures, but also in short run period they are different from those in long run period for monopolistic competition structure. Unlike long run period, in short run period a producer has restricted possibilities to respond to market situation. In particular, neither Starbucks Coffee Company, nor the Big Three will be able to change the amount of any production factor such as labor, capital, land or technology.
When to speak about monopolistic competition market structure, an important issue is that companies could have both profits and losses. A company like Starbucks will suffer from losses under the condition when its average total cost is bigger than equilibrium price. In long run period, monopolistic competitive company could gain only normal profit and their economic profit is equal to zero. Furthermore, producers will offer their products in long run period with the price that is equal to long run average cost.
On the contrary, in oligopoly market system firms produce output by which the price of a product is bigger than marginal cost. An important issue is that there are two approaches to the profit estimation of an oligopoly. The first one says that people should be happy with high profits of a company as the only way a firm can earn money is to sell what people want at affordable price. If a company raises lots of money, many people get the product they want. In contrast with this point of view, some people believe that that could by true only in terms of aggregate corporative revenue. Profit is a little bit different and shows that a company is selling at the price higher than marginal cost. For example, in case of conspiracy, an oligopoly restricts output and so it increases its profit. At the same time, it charges higher prices and satisfy fewer customers (The Economist, 2009).
In conclusion, the representatives of monopolistic competition market structure and oligopoly are Starbucks Coffee Company and American automotive industry respectively. Several general features distinguish monopolistic competition from oligopoly as well as several common features exist. Price elasticity of demand and the structures of revenues and cost are also crucial characteristics of market structures and so they influence monopolistic competition environment and oligopoly environment in a different way.