MONOPOLY AND OLIGOPOLY IN MICROECONOMICS

Monopoly And Oligopoly In Microeconomics

Monopoly And Oligopoly In Microeconomics

Introduction

Economists assume that there are a number of different buyers and sellers in the marketplace. This means that we have competition in the market, which allows price to change in response to changes in supply and demand. Furthermore, for almost every product there are substitutes, so if one product becomes too expensive, a buyer can choose a cheaper substitute instead. In a market with many buyers and sellers, both the consumer and the supplier have equal ability to influence price.

In some industries, there are no substitutes and there is no competition. In a market that has only one or few suppliers of a good or service, the producer(s) can control price, meaning that a consumer does not have choice, cannot maximize his or her total utility and has have very little influence over the price of goods.

Definitions

Monopoly

A monopoly is a situation where one firm completely dominates the market. This is exactly the opposite of perfect competition (explained later), and it means that one firm has 100% market share. There can be several circumstances that result in a monopoly.

If only one firm selling a unique product that they have various patents or copyright on, then the company has a monopoly on the market. A monopoly also results when no substitute product is being sold, leaving the consumer able to purchase only the monopolized product. This means that the market has extremely high barriers to the entry of another firm. Monopolies are commonly referred to as 'price setters, which means that because of their position in the market, they can set virtually any price for a good or service, and still have high demand for it, simply because no-one else is selling it. In Australia today, however, there are very few monopolies, but they still exist.

A prime example would be the water company. In order for a healthy marketplace and therefore economy, the government places restrictions on monopolies. The main reason for this is the fact that monopolistic firms have absolute power over the pricing of their products. Without government intervention, monopolies could charge any price for their products and consumers would be forced to purchase the product due to the lack of competition. A perfect example of a government restriction on monopolistic behaviour is to place a price ceiling on a product. This means that if the company sells its product for an amount greater than the quoted price ceiling, the firm is breaking the law.

Oligopoly

An oligopoly is a prime example of imperfect competition. They are the most common type of market structure in Australia, and they involve a few (relatively) large firms with a (relatively) large market share. The firms involved sell similar products, and the barriers to entry into the market are quite high (this explains why there are only a small number of firms).

Advertising is a key part of an oligopoly. A successful advertising campaign gets the public eye, and attracts consumers to the firm in question ...