Oligopolistic vs Monopolistic Market: A Comparison - Essay Sample

Introduction

The structure of the market is usually determined by various forces, which may be technological or strategist forces. The factors affecting the structure of the market include entry barriers, economies of scale, the nature of products, and the technology used (Bresnahan & Reiss, 1990). In this report, we are going to compare an oligopolistic market and a monopolistic market and the various factor defining these markets.

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Oligopolistic Market

An oligopolistic market is one that has few firms that sell similar products. These markets have entry barriers due to the high initial fixed cost, and that is why the market only has few firms. These firms have an interconnected relationship in such a way that the decision of one firm affects what the other firms will do. The firms may decide to take economic decisions together, thereby acting like a monopoly.

The collision of oligopolies has been made illegal in different countries like the USA, England, and other European countries. The reason why governments make collision of oligopolies illegal is that they increase the prices unfavorably in order to maximize their profits. The agreed price is usually above the market price, just like in a monopoly. The level of output produced will also be lower than the equilibrium output level. The firms in collisions come together and form an agreement on the output they should produce and even on the price to sell their goods. Consumers will have no choice but to accept the prices set by the cartel, who now collectively control the market. Intense competition between the few firms makes them act like perfect completion markets, and the profit margin lowers.

An oligopoly market has increasing economies of scale, thus making it hard for new firms that wish to enter the market. Increasing returns of size means that the already existing firms have economies of scale and can produce the products at a lower price than smaller firms can manage. The new firms will, therefore, not be able to compete with the existing firms and will be forced out of the market. The existence of an oligopoly may be because of the existing firms have expensive technology that is not available to other firms. The government may enforce policies that favor oligopolies; for example, the government may decide to give licenses to only specific companies in an attempt to help them mature and be able to compete with global companies. By the time the government gives the other companies a chance to set up their businesses, the first companies will already have grown.

Pepsi

Pepsico is a multinational company that produces beverages, food, and snacks. The company's headquarters are based in the U.S. New York City. The beverage and soft drink market qualifies to be an oligopolistic market because it only mainly faces competition from the coca-cola company, which also produces beverages. Pepsi and Coke are the two main products of Pepsico and Coca Cola companies. The company also faces competition from Nestle, Dr. Pepper, and Fraft companies. Pepsi and the other firms in the beverages sector all depend on each other. If Pepsi makes a change in its price or output, Coca Cola will have to make some changes too in response. Pepsi has the majority of sales but cannot control the market alone.

The graph above illustrates how Pepsi and coca cola have the majority of sales in the market. Pepsi and Coca cola both have economies of scale, and they have been able to dominate the market. Small companies like Danone and Nestle have not been able to penetrate this market, which is seemingly dominated by coca cola and Pepsi. Pepsi has managed to adapt strategic pricing in order to increase its sales. The company sells its products at a high price to the upper class and lower prices to the other markets (Muzumdar,2014). PepsiCo had made a deal with Russia, where it would become a middle man for Russia, and in return, Russia only allowed PepsiCo products to be sold in Russia. That example shows the interdependence between Pepsi and its competitors. Pepsi has over the years diversified in its business, and this has had a direct effect on the Coca Cola Company. Pepsi has been able to sell more than its primary competitor. According to (Statista Research Department, 2019), Pepsi is the most advertised beverage company and, this had had an effect on its competition because it made Pepsi the leading seller of soft drinks in the world.

Monopolistic Market

A monopolistic market structure is one that has many sellers, but the sellers have differentiated goods (Gregory, 1997). These goods are mostly close substitutes that compete against each other. Firms pay more attention to differentiating their products from the products of their rivals. A monopolistic market structure is different from an oligopoly market because it has many sellers, while an oligopoly market has only a few sellers. The players in a monopolistic market have to have good marketing structures to market their products vigorously in order to get an advantage over their rivals. However, the advertising fee cannot exceed the total revenue, failure to which would lead to a loss. Differentiation can also be through marketing or through methods of delivering the products is delivering physically or through an e-commerce platform like amazon.

Colgate Company

Colgate is an oral hygiene products manufacturing company based in the U.S. The company produces toothbrushes, dental floss, toothpaste, and mouth wash. The toothpaste industry is one that has a lot of companies producing and selling. There are very many brands of toothpaste like Colgate, Aqua fresh, Sensodyne, Crest, Pepsodent, and many more. Colgate company produces the same product as the other toothpaste manufacturers, but they differentiate them through advertising. Toothpaste companies differentiated their goods by having different tastes, smell, color, and by having different packing designs from other competitors in the market (Abbas, Zia-ur-Rehman & Khan,2016).

In the short run, Colgate makes profits because the price of the products is above the average total costs(ATP) of the products. However, in the long run, the firm makes zero profits because the firm the average total cost (ATP) is equal to price P. To maximize profits, marginal costs should be similar to marginal revenue (MR=MC). Therefore, in the long run, new firms will be encouraged to enter the market so long as the firms earn positive revenue in the short run. The entry of new firms in the market firm will make the supply curve shift to the left due to increased supply. The supply curve continues to increase until the firm it's a tangent of the ATC curve, therefore, maximizing the profits. The more a monopolistic market has more firms, the more the market gains the characteristics of a perfect market.

Colgate produces twenty-seven different types of kinds of toothpaste. The company differentiates its products by using different brands like Maximum Cavity Protection, Herbal, Sensitive, Kids, and many more. It also has different kinds of toothpaste for different uses, for example, whitening teeth, fresh breath, and cavity protection. Colgate has to advertise its products for them to earn the trust and loyalty of the consumers. Other toothpaste manufacturing companies are also supposed to promote their brands because consumers have the choice of choosing other brands. There is no interdependence between Colgate and other firms.

From the table above, Colgate uses its brand name to create other differentiated goods that compete with the other brands from other companies like Crest and Sensodyne. Brands like Colgate Max Fresh, Optic White, and Colgate Total have been differentiated to the extent that they make more sales than other companies' actual product names like Sensodyne.

An oligopoly market has a few firms who deal with similar or identical goods. The firms are interconnected to each other such that decisions made by one firm will definitely have an effect on the other firms. On the other hand, a monopolistic market is one that has many sellers. However, the goods are close substitutes so he sellers differentiate the products from. In a monopolistic market, firms have to invest in advertising.

References

Bresnahan, TF & Reiss, PC 1990 Entry in Monopoly Market, The Review of Economic Studies, Volume 57, Issue 4, October 1990, Pages 531-553, https://doi.org/10.2307/2298085

Gollop, FM & Roberts, MJ 1979, 'Firm interdependence in oligopolistic markets,' Journal of Econometrics, vol. 10, no. 3, pp. 313-331. https://doi.org/10.1016/0304-4076(79)90087-3

Gregory NM, 1997 'Chapter 16: Monopolistic Competition Principles of Economics, 7th Edition https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=9&cad=rja&uact=8&ved=2ahUKEwjt84eqndzoAhVOhRoKHYzlAS4QFjAIegQIAxAB&url=http%3A%2F%2Fwww.unm.edu%2F~parkman%2FM16.pdf&usg=AOvVaw1s7oAyZZMQU9uQuU13f8b-

Muzumdar, Prathamesh, 2014. A Study of Business Process: Case Study Approach to PepsiCo. SSRN Electronic Journal. 10.2139/ssrn.2392611

Statista Research Department, Mar 29, 2019 'PepsiCo - Statistics & Facts' https://www.statista.com/statistics/995443/leading-food-packaging-companies-worldwide-based-on-revenue/

Martin, L, Morvay, K, Silanic, P, Weiss,C & Yontcheva ,B 2017 Market structure and competition in transition: results from a spatial analysis ORCID Icon Pg 1694-1715 | Published online: 04 Oct 2017 https://www.tandfonline.com/doi/full/10.1080/00036846.2017.1374535