Chapter 8 · Microeconomics
Monopoly, Oligopoly, Monopolistic Competition and Contestability
Expand each section to revise: use the chevron to open and close. Printable in full by printing this page.
Key Definitions
- Monopoly
- A single firm that is the whole industry, protected by high barriers to entry, with imperfect information and a unique product.
- Legal monopoly
- Usually defined as one firm controlling a market share of about 25% or higher.
- Oligopoly
- A market with a few dominant firms exhibiting high interdependence; a 4-firm concentration ratio above 60% is highly oligopolistic.
- Monopolistic competition
- Many small firms with differentiated products, no barriers to entry and imperfect information.
- Contestable market
- A market where entry and exit are easy because sunk costs are low, so incumbent firms face the discipline of potential competition.
Core Concepts
Monopoly characteristics
- One firm equals the whole industry.
- High barriers to entry (BTE).
- Imperfect information.
- A unique product with no close substitutes, so demand is inelastic.
- The firm is a price setter.
Types of barriers to entry
- Access: control over inputs and markets.
- Cost: economies of scale and high fixed costs.
- Financial: difficulty getting loans, shares, bonds, collateral or reputation.
- Legal: patents, copyright and licences.
- Strategic: limit pricing, predatory pricing, exclusive contracts, advertising and branding.
- Information: advantages through R&D techniques and product quality.
Oligopoly
- A few dominant firms with high interdependence.
- High barriers to entry and imperfect information.
- Homogeneous products, for example crude oil and cement, or differentiated products, for example cars, smartphones and soft drinks.
Monopolistic competition
- Many small firms with differentiated products.
- No barriers to entry.
- Imperfect information.
Contestability
- High when entry and exit are easy, with scope for hit-and-run competition.
- Lower sunk costs make a market more contestable; for example Airbnb lowered the sunk costs of entering accommodation.
- Weak consumer loyalty also makes a market more contestable.
Real-World Examples
- Homogeneous oligopoly products: crude oil and cement.
- Differentiated oligopoly products: cars, smartphones and soft drinks.
- Airbnb raised contestability in the accommodation market by lowering sunk costs.