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December 22, 2014 

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FIRM OBJECTIVES: The standard economic assumption underlying the analysis of firms is profit maximization. Firms are assumed to make decisions that will increase profit. Generally speaking, profit maximization is the process of obtaining the highest possible level of economic profit through the production and sales of goods and services. For a more thorough discussion of this topic, see the profit maximization entry. Real world firms might pursue other objectives including: (1) sales maximization, (2) pursuit of personal welfare, and (3) pursuit of social welfare. In some cases, these other objectives help a firm pursue profit maximization. In other cases, they prevent a firm from maximizing profit.

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OLIGOPOLY AND MONOPOLY:

Oligopoly and monopoly have some similarities, both tend to be relatively large and possess significant market control, but also have a few important differences, oligopoly market has more than one firm. The dividing line between oligopoly and monopoly, however, can be blurred due to the closeness of substitutes and the inclination of oligopoly firms to collude.
Oligopoly is a market structure containing a small number of relatively large firms that often produce slightly differentiated output and with significant barriers to entry. Monopoly is a market structure containing a single firm that produces a good with no close substitutes and with significant barriers to entry. While it might seem as though the difference between oligopoly and monopoly is clear cut, such is not always the case.

A comparison between these two market structures is bound to be illuminating.

  • One or Few: The primary difference between oligopoly and monopoly is that monopoly contains a single seller, whereas oligopoly has two or more sellers. Such a difference might seem to provide a clear separation. But not necessarily.

  • Substitutes: In some cases, the difference between oligopoly and monopoly is blurred by the closeness of substitutes. A monopoly produces a good with NO close substitutes. An oligopoly firms produces a good with a small number of relatively close substitutes.

    However, the oligopoly-monopoly difference is blurred if an oligopoly firm pursues product differentiation to such an extent that it creates a product with no close substitutes. As such, the oligopoly moves closer to monopoly. For example, Microsoft was once one of several oligopoly software companies. However, continued modification and enhancements of its software increasingly reduced the degree of substitutability with other software, moving it closer to monopoly status.

    Alternatively, changes in the goods produced by other firms can make the good produced by a monopoly good more of a substitute. As such, the monopoly firm becomes more of an oligopoly. For example, AT&T once held a nationwide monopoly on telephone services. Technological advances, such as cellular telephones, allowed other firms to offer increasingly close substitutes, moving AT&T to oligopoly status.

  • Cooperation: The dividing line is also blurred between oligopoly and monopoly due to cooperation and collusion. The small number of large firms in oligopoly creates an opportunity and an incentive to cooperate rather than compete. Doing so can effectively transform an oligopoly industry into a monopoly. The industry might contain more than one firm, but those firms act as one.

<= OLIGOPOLY AND MONOPOLISTIC COMPETITIONOLIGOPOLY, BEHAVIOR =>


Recommended Citation:

OLIGOPOLY AND MONOPOLY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: December 22, 2014].


Check Out These Related Terms...

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


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 | monopoly, realism | cross elasticity of substitution |


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