What is the difference between monopolistic competition and oligopoly?

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thetall eNotes educator| Certified Educator

The fundamental differences between an oligopoly and monopolistic competition can be broken down into three categories. An oligopoly is made up of a small number of dominating firms, while monopolistic competition market structures are comprised of many small firms. An oligopoly market structure features strong barriers of entry into the market, which can take the form of government policies, required capital or specialized technology. On the other hand, monopolistic competition features structures with minimal barriers to entry; firms can enter and exit the market with few restrictions based on their capabilities. The geographical area may also point to a difference between an oligopoly and a monopolistic competition structure because oligopolies are known to be dominant in small towns; not many firms would want to compete in a small fraction of the market. Thus, monopolistic competition would be dominant in larger areas with a significant number of people.

Although the differences are clear, there are situations where the difference between the two structures may not be obvious. For instance, a market with a large number of firms dominated by very few can be considered an oligopoly and not monopolistic competition as determined by the number of firms that exist in that market.

pohnpei397 eNotes educator| Certified Educator

There are three differences between monopolistic competition and oligopoly. 

The first, and perhaps least important, is the difference in the type of product that they make.  An oligopoly can produce either a homogeneous product or a differentiated product.  That is, it can be a product like gasoline, where there is no real difference between one brand and another, or it can be like soda or cereal where there are real differences.  Monopolistic competition only occurs when the product is differentiated.

Second, there are relatively high barriers to market entry in an oligopoly whereas the entry into monopolistic competition is relatively easy.  Auto makers are an oligopoly as it would be very expensive to start an entirely new car company from scratch.  By contrast, small restaurants are easy to start and are an example of monopolistic competition.

This factor leads to the third factor, which is the number of sellers.  Since it is easy to enter a monopolistic competition, there are many sellers in such a market (many small restaurants in every town).  By contrast, it oligopoly, there are only a few large sellers (think of how few automakers there are).

These are the main differences between these two market structures.