Monopoly, Oligopoly, And Monopolistic Competition: Understanding Different Models Of Market Forms

Monopoly and its Characteristics

Monopoly is a type of market form and it is the opposite form of perfect competition. In another sense, it is a type of market form where one single firm or a small group of firms join together to control the entire supply of particular goods and services in a region with no other competition and close substitutes to provide authority to sell that product. A monopoly market is ruled by a single entity in a particular department. For example, railways operated by the government are the single option for consumers as there are no other substitutes for traveling in the railway department. (Zeuthen 2018). The monopoly is divided into four different models classified as a natural monopoly, geographic monopoly, technological monopoly, and government monopoly. A natural monopoly is a market monopoly where the market is efficient for one business to prosper. Geographic monopoly is dependent upon the location where other sellers are not available in the location to expect one. Technological monopoly is based upon the ownership of scientific advances and manufacturing methods by one single entity and government monopoly is the department which government runs and operate and no other firms are allowed to compete. A monopoly market is considered as the profit maximize for the firms or the single entity supplying the goods as there is no other alternative option. Price discrimination is one of the characteristics of the monopoly model as only a single company is ruling the market, and consumers have no choices to look for other alternatives makes the company change price according to their own will. (Merhav 2017). Other characteristics of monopoly are high barriers and price maker. The other sellers are unable to enter the market because of barriers of high authority. In a market where monopoly is followed specific sources control and generate the market stability. These sources of power can be the scale of economies, capital requirements, and technological superiority.

Oligopoly is considered a market form where small numbers of firms are independent in terms of pricing and output policies. The size of the firms is small giving power of ruling the market on their terms. These types of markets are dominated by a small number of suppliers and can be found in almost all the countries and almost all the range of sectors are applied in the market form. The best form of this market is not a single firm enjoys a large amount of market power. (Colombo and Labrecciosa 2021). Unlike monopoly oligopoly market is different as firms cannot raise the price of the goods anytime because of competition in the market and in order to gain economic profit oligopoly firms are needed to collude. Most of the oligopoly industries are exist in the market are relatively undifferentiated and provide broadly the same benefits and offers to the customers. Dzhabarova et al. 2020). Consumers in oligopoly markets have a limited number of choices but have the option to purchase products from different firms if it is necessary. French mathematician Joseph Bertrand criticized the Cournot solution of duopoly and introduced a substitute model called Bertrand’s Duopoly model. according to him, there was no limit of falling prices as each producer has the option to lower the prices of goods and can increase the supply of output until the price becomes equal to the unit cost of production value. Bertrand model suggests that the producer never decides the product output and instead the first price is decided and then the output is produced demanded at that value of price. Bertrand's model also suggests that it is not important for the producers to know the market demand of their products. Instead, it is enough for the producer to know that their product can capture the by undercutting the rivals. (Killingback and Killingback 2021). The main difference between Bertrand and Cournot model of the duopoly is, in the Cournot model output is variable as each producer adjusts output by keeping tracking of the rivals output is doing in the present whereas in Bertrand model price is variable whare producers believes that their rivals price will be constant at the present times and adjusts its price according to the criteria of the market. The famous two models of Bertrand and Cournot were challenged by a new model called Chamberlin’s Oligopoly model which suggests that firms act intelligently and firms in an oligopoly market recognize interdependence. According to Chamberlin oligopolists have learned from experience and have decided to act accordingly and change in the output level of producers will act their rivals to react and adjust their output level of production. Here firms decide to change the rivals' output and price by mutual interdependence. (Guicherd 2018).

Different Models of Monopoly

Monopolistic competition is the market where firms are producing customers with products with different uniqueness as this type of market has perfect competition. The number of firms in a monopolistic market is at large numbers. And produce competition among the firms. Each firm in a monopolistic market is differentiated its products from other firms in terms of uniqueness of products. For example, cooking oil is produced by many companies but every company has a uniqueness like the taste and healthy providing nutrients and many more. The differentiated product in the monopolistic market reveals that if the price of goods of one has risen then consumers have the option to switch to other firms within the industry. From the industry point of view, this will pose a downward demand curve and it is dependent upon the price and substitutes of the product present in the market for the customers. (Bertoletti and Etro 2017). The main difference between monopoly and the monopolistic market is that in monopoly due to no competition and substitutes the firm has authority to maximize the profit whereas in a monopolistic market situation the consumers have authority to change the product as a lot of option is available in the market. The customers falling under the monopolistic market approach has two distinctive feature love of variety and ideal approach as consumers has choices to try new products of other characteristics from different firms rather than sticking to one firm. There are free entry and exit in the monopolistic market as firms earning profit act as a medium for other firms to open their market in the sector and firms exiting the market cause a negative effect on other firms in a similar sector. A monopolistic market requires innovation constantly for the firms as similar products will not attract consumers and too many options in the market put firms to act quickly in the varieties and diversification for better results. (Gil-Moltó et al. 2020).

For the benefit of the consumers, the monopolistic model is the best form of the market as this type of market provide the option for the consumers to choose a variety of goods and also at a low price as each firm due to competition in the market tries to fluctuate the price of their products in order to attract customers. In certain situations, the government tries to encourage monopolies created by the government in order to control the economic scale by benefiting the customers by keeping the cost down. (Parenti, Ushchev and Thissem 2017).  Oligopoly is the balance of the market where firms are interdependent and run a business in the region with a limited number of choices for the consumers. Oligopoly's biggest advantage is of collaboration of firms to keep the price under control and oligopolies for economic benefits raise the barriers to entry of other firms in the market. Perfect competition is what consumers are looking for in order to gain profits with no extra prices and monopolistic competition provides the best type of market by providing a variety of choice at an affordable cost to the customers and free-market also help the government to enter new companies in the market providing employment and economic benefit to the country. (Marjit and Mandal 2021).

References 

Bertoletti, P. and Etro, F., 2017. Monopolistic competition when income matters. The Economic Journal, 127(603), pp.1217-1243.

Zeuthen, F., 2018. Problems of monopoly and economic warfare. Routledge.

Merhav, M., 2017. Technological dependence, monopoly, and growth. Elsevier.

Killingback, J. and Killingback, T., 2021. Evolutionary dynamics of Bertrand duopoly. Journal of Physics: Complexity, 2(3), p.03LT01.

Guicherd, T., 2018. Edward H. Chamberlin's Duopoly: The Reformulation of Monopolistic Competition Theory. Edward H. Chamberlin's Duopoly: The Reformulation of Monopolistic Competition Theory, pp.51-63.

 Dzhabarova, Y., Kabaivanov, S., Ruseva, M. and Zlatanov, B., 2020. Existence, Uniqueness and Stability of Market Equilibrium in Oligopoly Markets. Administrative Sciences, 10(3), p.70.

Parenti, M., Ushchev, P. and Thisse, J.F., 2017. Toward a theory of monopolistic competition. Journal of Economic Theory, 167, pp.86-115.

Marjit, S. and Mandal, B., 2021. Monopolistic Competition, Optimum Product Diversity, and International Trade-The Role of Factor Endowment and Factor Intensities.

Colombo, L. and Labrecciosa, P., 2021. Dynamic oligopoly pricing with reference-price effects. European Journal of Operational Research, 288(3), pp.1006-1016.

Gil-Moltó, M.J., Poyago-Theotoky, J., Rodrigues-Neto, J.A. and Zikos, V., 2020. Mixed oligopoly, cost-reducing research and development, and privatisation. European Journal of Operational Research, 283(3), pp.1094-1106.