Evaluate the effectiveness of monopolistic competition and oligopolies in meeting the needs of producers and consumers.

A market is a place where buyers and sellers meet to exchange money for goods and services. There are four market structures; perfect competition, monopolistic competition, oligopoly and monopoly. Each structure of market operates in their own ways with each with their own characteristics; each structure has its own number and size of the firms, the level of the competition, product differentiation and difficulty of entering new firms into the market. The two similar structures are monopolistic competition and oligopolies; although they are similar they still operate quite different to each other.

Monopolistic competition is defined as the structure with many small firms selling products of similar kind, therefore lots of choice and lots of range which means that there are lots of substitutes. Due to the fact that there are lots of substitutes price plays an important role; if a firm has established some sort of brand name or store name it will be able to charge a slightly increased price, but yet a very high increase in price will result in decrease of its market share. As firms have a very limited control on price to gain more consumers firms are involved in strong non-price competition of quality, advertising, packaging, promoting brand names, etc… To enter into a monopolistic market is relatively easy as there is no established market. Examples of this market structure include restaurants, hotels, clothing, shoes, bakeries, etc…

Consumers of monopolistic competition gain very low prices because of the increased competition between producers who use price and non-price methods to gain more customers; producers have little control over price. Producers have to have a very good standard of quality as there is lots of competition so therefore consumers can expect good quality of products. Use of technology is limited as there are lots of firms who do not have sufficient capital to expand there businesses. Customers have very good knowledge of products and these consumer patterns can cause producers to differentiate their products. In this market firms may go through losses and profits, if firms establish a brand loyalty producers have some control over their prices and an increased profit. In this market structure consumers are sovereign.

An oligopoly is a market structure where there are a small number of large firms selling products very similar or same. In this market structure there are lots of choice and range. Each firm in this market has a large market share. Firms have very fierce non-price competition which includes quality, advertising, service, packaging, and reliability. Price competition is very rare as this will cause firms to surrender profits which lead to losses in market share. Because firms are established new firms who want to enter this market structure have high barriers to enter, barriers to this market structure include set-up costs, economies of scale, licenses, the very high advertising, and raw materials.

Consumers in an oligopoly can do not receive the lowest prices as in a monopolistic competition market as producers have more control over their prices because of lack of competition as of a small number of firms. Consumers can expect very high quality products and producers use of new technology which improves quality and increases product efficiency ensures this. Consumers may not get the right information or there is a lack of information about the products. Producers keep an close eye on their competitors because the competition strategies used by each firm effects the operations of theirs. Since consumers are not sovereign in this market structure producers normally achieve above ‘normal’ profits.