Sean has 8 years experience as a supervisor and has an MBA with a concentration in marketing.
Have you ever wondered why a company doesn't just enter into a market with little to no competition? Unfortunately, it is not that easy. Various industries operate with different levels of competition. The decisions a company makes often have to do with the amount of competition it has. Being competitive is essential to being successful. When operating a business, it is critical to know how many competitors you have, and how your industry works. For instance, if you want to get into the liquor industry it would be essential to know there is a lot of competition, and the pricing of your products has to align with competitors' pricing. If you were to operate in a niche market or vertical market, there is less competition involved because it is a specialized product or service.
If you want your business to have complete control over the market, you would want to have a monopoly. A monopoly has pricing power in the market and no competition because of a high barrier to entry. When there is a high barrier to entry, there are high start-up costs or other obstacles that make it more difficult for competitors to enter into the market.
A monopoly can charge others high prices because there are no other companies offering similar products or services. I know, you are thinking how fair is that? It's not very fair, but unfortunately, companies often have no choice but to get products from a monopolistic company. Depending on the industry there could be regulations to help control a monopoly's pricing of products.
Let's say Joe moves to a new neighborhood. He wants cable but there's only one cable company serving the area. It's a monopoly because it sets the price to be whatever it wants; there is no competition because a new business would have to set up all that infrastructure first (high cost of entry). While the cable company may charge high prices, Joe has no other option if he want to receive multiple channels.
A oligopoly is a market that has few suppliers, and the companies that operate in it face little competition because of the high barriers to entry. Unlike a monopoly, these companies do not have complete control over their pricing. They have to keep track of competitors' pricing and adjust their prices accordingly. The fixed costs for entering into the industry are high which is why it's hard for companies to come into the market and be successful.
Joe wants to set up landline phone service; there are only three companies to pick from. This is an oligopoly because there's some competition among them, but not a lot. It's easier for a new company to enter the market in this case because there's a lower barrier to entry; most homes are already wired for landline phone service, so some of that infrastructure is already there.
Monopolistic competition has a lot of competitors, and barriers to entry into the market are low. This means start-up costs are low, and there are not many obstacles to get into business. Pricing is highly competitive in monopolistic competition. When there is a lot of competition, it is important for businesses to make a unique product or service. Companies have to brand themselves and use different marketing techniques to help differentiate themselves from competitors.
Monopolistic competition is the complete opposite of a monopoly that has complete control over its market. An example of a monopolistic industry would be the clothing industry. There are many different companies, and they have to try and create a unique perception among consumers. Companies in a monopolistic competition market have to remain competitive with their pricing to help maintain and gain customers, in part because customers have so many companies from which to purchase products or services.
Joe wants a TV stand that will also hold a cable box and phone/answering machine, so he goes to the store to buy one. Companies that make TV stands operate in monopolistic competition; Joe can go to one of several competing big box or locally-owned stores for this item. It's comparatively easy to for a business to enter this market because a business needs only storefront and inventory.
A monopoly has pricing power in its market and has no competition; there typically is a high barrier to entry in this market. A oligopoly is a market that has few suppliers, and these suppliers face little competition because of the high barriers to entry. Unlike a monopoly, these companies do not have complete control over their pricing. Monopolistic competition has a lot of competitors. Barriers to entry into the market are low. Pricing is highly competitive in monopolistic competition.
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College Macroeconomics: Tutoring Solution15 chapters | 148 lessons
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