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October 23, 2014 

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VERTICAL MERGER: The consolidation under a single ownership of two separately-owned businesses that have an input-output relationship, in which the output of one firm is the input of another. An example of a vertical merger would be a soft drink company merging with a sugar company to form a single firm. A vertical merger should be contrasted with horizontal merger--two competing firms in the same industry that sell the same products; and conglomerate merger--two firms in totally, completely separate industries.

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OLIGOPOLY AND MONOPOLISTIC COMPETITION:

Oligopoly and monopolistic competition have some similarities, but also have a few important differences. Both are examples of imperfect competition on the market structure continuum between ideals of perfect competition and monopoly. However, oligopoly contains a small number of large firms and monopolistic competition contains a large number of small firms. The dividing line between oligopoly and monopolistic competition can be blurred due to the number of firms in the industry.
Oligopoly is a market structure containing a small number of relatively large firms, with significant barriers to entry of other firms. Monopolistic competition is a market structure containing a large number of relatively small firms, with relative freedom of entry and exit. While it might seem as though the difference between oligopoly and monopolistic competition is clear cut, such is not always the case.

A comparison between these two market structures is offers a little insight into each.

  • Many or Few: The primary difference between oligopoly and monopolistic competition is the relative size and the market control of each firm based on the number of competitors in the market. However, there is no clear-cut dividing line between these two market structures. It is not possible to say that some number like 50 firms is the dividing line, such that 50 firms make it an oligopoly and 51 make it monopolistic competition.

    While one industry containing only 3 firms is clearly oligopoly and another industry with 30,000 firms is undoubtedly monopolistic competition, the structure of an industry with 30 firms or 300 firms is not as obvious.

    Such industries might have characteristics of both oligopoly and monopolistic competition. As the number of firms decreases, the firms tend to behave more like oligopoly and less like monopolistic competition.

  • Dominance by a Few: In some cases status depends more on the dominance of a few firms rather than the total number of firms in the industry. An industry with 3,000 relatively equal firms is most assuredly monopolistic competition. However, an industry with 3,000 firms, that is dominated by 3 relatively large firms, is most likely oligopoly. For example, the petroleum extraction industry has thousands of firms, but a handful of the largest firms dominate the market, making it an oligopoly.

  • Geographic Area: In other cases, the geographic size of the market is the prime determinant of market structure. A particular industry might be monopolistic competition in a large city, but oligopoly in a smaller town. Retail sales offer an example. Larger cities usually have hundreds, even thousands, of shopping alternatives, including discount super centers, mom-and-pop stores, shopping malls, and nation-wide chains. Such a market is monopolistic competition. Smaller towns, however, tend to have fewer stores, perhaps a single super center or shopping mall and a handful of stores located in a small downtown area. Such a market is oligopoly.

  • Barriers to Entry: A key difference between oligopoly and monopolistic competition is barriers to entry. Oligopoly barriers are high. Monopolistic competition barriers are low. However, entry barriers are a matter of degree. The need for government authorization is one entry barrier that can create oligopoly, especially if entry is limited to only a few firms. However, it can also create monopolistic competition if a larger number are allowed entry. Other barriers, such as start-up cost and resource ownership, also limit entry to different degrees, leading to either oligopoly or monopolistic competition. Moreover, these entry barriers can change over time, transforming oligopoly into monopolistic competition or vice versa.

<= OLIGOPOLYOLIGOPOLY AND MONOPOLY =>


Recommended Citation:

OLIGOPOLY AND MONOPOLISTIC COMPETITION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: October 23, 2014].


Check Out These Related Terms...

     | oligopoly, characteristics | oligopoly, behavior | monopolistic competition, characteristics | monopoly and perfect competition | oligopoly and monopoly |


Or For A Little Background...

     | oligopoly | monopoly | market structures | market control | firm | industry | competition among the few | short-run production analysis | profit maximization | efficiency | production |


And For Further Study...

     | market share | concentration | kinked-demand curve | merger | collusion | barriers to entry | game theory | perfect competition | monopolistic competition | product differentiation | oligopoly, realism |


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