Oligopoly, Monopoly and Market Structure

Monopolistic Market Structure

According to Scherer and Ross (1990), a monopolistic market structure consists of only one manufacturer of a product throughout the industry. A monopolist cannot charge whatever price he or she wants because there is only one producer in the industry. The primary purpose of a business is to maximize profits. Monopolies maximize profitability when the Marginal Revenue (MR) equals the Marginal Cost (MC) (MC). If a producer or monopolist charges prices above the equilibrium price, demand will fall since the customers’ maximum price has been exceeded. The demand curve of a monopoly firm is sloping downward, indicating that an increase in price reduces the demand for a product hence the statement that a monopolist can charge whatever price he or she wishes is false. Besides, a monopolist does not enjoy an absolute market power where the prices do not affect sales.

Oligopoly Market Structure

According to Mazzeo (2002), oligopoly implies a structure where a small number of firms (usually two to seven) possess the majority of share in the market. A typical example of an oligopoly market structure is the operating systems market dominated by Apple and Windows. These two firms own ninety percent of the entire market. The oligopoly market dominated by Apple and Windows is characterized by barriers upon entry into the market, lack of uniformity in the size of the firms, interdependence of the firms and indeterminateness of the demand curve. Advertising is a useful tool in the hands of any oligopolist (Mazzeo, M. J. 2002). For instance, if Apple decides to invest in an advertisement, it will be doing so to change the firm’s policy and attract a larger market. Windows will resist the aggressive advertising to maintain their competitiveness.

References

Mazzeo, M. J. (2002). Product choice and oligopoly market structure. RAND Journal of Economics, 221-242.

Scherer, F. M., & Ross, D. (1990). Industrial market structure and economic performance (3rd ed.). Boston: Houghton Mifflin Company.