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Oligopoly vs Monopoly
5
Last Few Definitions....
Natural Monopoly: a market that runs most efficiently when one large firm supplies ALL of the output
Government Monopoly: A monopoly created by the government
Patent: a license that gives the inventor of a new product the exclusive right to sell it for a specific period of time
License: government-issued right to operate a business
Price Discrimination: the division of consumers into groups based on how much they will pay for a good
Four Conditions of Monopolistic Competition
1. Many firms exist in a monopoly- there are no high start up costs and can begin selling goods quickly
2. There are few artificial barriers to entry- patents and licenses don't prevent people from entering a market
3. They maintain LITTLE control over price- pricing tends to be reflective of consumer spending
4. There are differentiated products; the allows a seller in a monopoly to profit from the differences between his/her products and the competitors products
Understanding Monopolies and Monopolist Competition
Perfect Competition: a market structure in which a large number of firms all produce the same product and no single seller controls supply or prices
Monopoly: a market in which a SINGLE seller dominates
--> Some monopolistic practices have been outlawed in the US
Monopolistic Competition: a market structure in which many companies sell products that are similar but not identitcal
EX: Jeans- there are many styles and brands but none are IDENTICAL
Government Concerns with an Oliogolpoly
Obstacles to Becoming an Oliogolopy
-Concerns that there may be a Price War (this occurs when competitors cut their prices very low in order to win business)
-Collusion: this is an agreement among members of an oliogopoly to illegally set prices and production levels
--> This can also lead to Price Fixing! Price Fixing is an agreement among members of an oliogopoly to sell at the same price or very similar prices
-Cartel: this is a formal organization of producers that agree to coordinate prices and production
-->They are LEGAL in other countries but NOT in the United States! For example, OPEC (cartel dealing with Oil)
-Start up costs can be extremely high due to expensive machinery, large production facilities
-Technological barriers can exist
-Patents and government licenses can also present a problem for companies
What is an Oligopoly?
-Economists usually call an industry an oligopoly if FOUR largest firms produce 70-80% of the output
EX: Cell Phone companies- ATT, Sprint, Verizon, T-Mobile have majority of the business!
What is an Oligopoly?
-A market structure in which a few large firms dominate a market