Oligopoly vs. Monopoly 1

Joe Ricardo

APUS

Econ 600

August 30, 2014

Oligopoly vs. Monopoly

Abstract

While monopolies sometimes still exist in the United States our economy and most of the

economies of the world are controlled by Oligopolies. Whether it is one or a few firms

controlling the market, it is difficult for any small business to enter into a market already

dominated and controlled by large firms.

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Oligopoly vs. Monopoly

There are several market forms in our modern world but they are mainly divided into two

forms those being oligopolies and monopolies. Our markets here in America are mainly

dominated by oligopolies or several top companies controlling each market segment. There are

rare cases where one firm is able to control a large majority of the market such as Microsoft with

software, mainly operating systems in the late 1990’s into the early 21st century and currently

Google monopoly with the search engine industry. We will now examine the differences and

similarities in these different market forms as well as show a case study of the history of

monopolies here in the United States.

In a perfect competition industry price and output are estimated by a determination of

what the intersection of both the supply and demand is. The cost per unit is constant and the

output is shared by a large number of firms. The unfortunate side of perfect competition is that

the firms will make zero economic profit and therefore perfect competition does not work

because businesses are in the market to make a profit.

A monopoly is a single firm selling a unique product, yet in a perfect competition all

firms will sell an identical product. A monopolistic competition is a blend of both of these;

where firms will sell products that slightly differ from one another. In this monopolistic

competition firms will attempt to attract customers with perceived instead of actual differences,

claiming to have a superior product when theirs is indeed the same as the competition. Some will

attract customers on their brand name alone, while others will have better marketing and

advertising strategies, others will have better customer service or support for their products. One

of the main controlling aspects will be which firm offers their product for the most affordable

price, this will drive sales for their product over the competition as consumers will not pay more

for the exact same product in quality, but would do so for a superior quality product.

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Oligopoly vs. Monopoly

An oligopoly is a market that is dominated by a small number of business firms

competing with one another. Their actions directly impact one another’s profits as one firm’s

actions will either increase or decrease the marginal costs within the market. The competitions

product will be in comparison either a strategic substitute or a strategic compliment (Bulow,

1985). By one firm lowering the price of their product or producing a larger quantity they will

affect the other firms who will strategically have to either lower or raise their own prices.

Michael Porter’s Five-Forces model is centered on internal industry rivalries. In most

markets while there may be many firms within that specific market there is usually only a small

number of firms competing at the top. For instance Wal-Mart dominates the discount retail

market, but there is also Target and K-Mart but for the most part those are the three top

competitors in that industry. While there are numerous automobile manufacturers in the world

only three automobile companies control 10% or more of the market those being Toyota,

General Motors and Volkswagon respectively (Lowry, 2014). We can find examples of most

industries having three to four on average top competitors at the top of their respective industry

and in most case one industry leader that all of the competition is attempting to supersede. We

can observe the concentration ratio of certain markets and see how much of those markets the top

four companies control. The top four firms that produce laundry machines control 98% of that

market, the top four firms in the refrigerator manufacturing business control 94% of that market

as well as beer, aluminum refining, web search and warehouse clubs top four firms control 90%

or more of their markets.

Oligopolies are the industry standard in our current global economy as the ones in power

remain in power and have the capital to continue to profit. There are barriers to entry into the

oligopoly as it is hard for a mom and pop business or a start up to raise enough capital to

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Oligopoly vs. Monopoly

compete in a market controlled by big corporations with large capital as well as long histories

within those industries.

A monopoly is when a market is controlled by only one seller of a certain product or

service. A company has a monopoly if they control 90 percent or more of a single market, but

one may assume that a percentage close to this could be considered a monopoly by many. Pure

monopolies are very rare here in the United States but had been in America since the colonial

era. It is estimated that only 3 percent of the gross domestic product in America is produced by

monopolies.

For a monopoly to be successful there must be barriers to entry from competition. There

are many forms of barriers to entry which will not allow for other firms to enter into the same

market and be able to compete on an equal level with the current firm holding the monopoly. In

many industries the capital requirement necessary to enter the market are so enormous that most

firms cannot afford to enter it, such as oil refinery, automobile manufacturing and defense. Many

large corporations have a large share of the market and can be considered in many cases to be a

monopoly. Wal-Mart for instance has a high share of the discount retail market and we can see

how it would be difficult with their influence around the world and sheer size to gain a foothold

in the discount retail market and actually compete head to head with them. Intel has a large

market share of microchip processors and while there are other companies producing

microprocessors the majority of our PC’s and other computer devices use the Intel

microprocessors. While Yahoo once dominated the search engine market and Bing (Microsoft)

attempted to take control of that market as they did with the software market in the PC world it is

Google who now dominates the search engine market, and it appears they will continue to do so

for a long time as their web search technology is far superior and more easy to use than their

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Oligopoly vs. Monopoly

competition. Some corporations have control of certain resources that give them a monopoly in a

product such as OPEC’s control of the world’s oil and DeBeers control of most of the world’s

diamonds. The only technically legit form of a monopoly in my opinion is a person or company

that has a patent, or copyright on an idea, process, or system and these patents stay intact for 20

years and make it so no one else can make, use or sell that invention.

The pricing strategy is simple a monopoly can control the price of their goods and

service. A monopoly can use their position in the market to manipulate the supply and demand

for that product by basically lowering their output and therefore raising the price due to the

demand. The monopoly can charge the highest price that the consumer is willing to pay.

Dr. William W. Sharkey believes that a natural monopoly under the proper conditions is a

preferable form of organization for the market (Sharkey, 1983). He believes in a properly

regulated natural monopoly market the price would be both in his world “optimal” as well as

“subsidy free”.

Let us make a case study of the history of monopolies here in America. We think of

America as being a country with a free market but as we will observe, monopolies that the

government feel are either necessary or more convenient are still to this day allowed to operate

here in our country.

Larger companies from the Old World were given charters for large scale projects in the

New World. These monopolies lasted until 1890 with the Sherman Antitrust Act which banned

monopolies that were interfering with domestic and international free trade (Beattie, 2014).

Unfortunately this act did not abolish monopolies all together but instead gave the government

the power to by their discretion determine what a good or bad monopoly was. For example the

government decided that International Harvester was a good monopoly because they produced

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Oligopoly vs. Monopoly

and sold their agricultural equipment cheap and therefore were favored by the people who were

mostly an agrarian nation. On the other hand American Tobacco due to charging a high amount

for their tobacco product were targeted by the government in 1907 and finally broken up in 1911.

It would seem it was the government’s objective to close monopolies that they felt were

overcharging the consumers while allowing monopolies who were selling their goods or services

cheap to stay in business.

At the turn of the 20th century came Standard Oil where Rockefeller and his partners were

able to capitalize on the rarity of oil which at the turn of the century was being used in the

automobile and as a source of energy to power cities. One thing Standard Oil did that the

competition failed to do was to use the byproducts (waste) of oil to make other products such as

Vaseline. Other oil companies were not properly disposing of their waste and therefore when

regulations came about many oil companies went out of business and Standard Oil was able to

corner 90% of the market. Standard Oil was able to build up the infrastructure of America which

in our modern times is now dominated and controlled by oil. It was not until 1911 that Standard

Oil was forced to break up after a Supreme Court ruling that they were an illegal monopoly.

Soon after came the Clayton Act in 1914 which aimed to make specific monopolistic acts illegal

and strengthen what the Sherman Act began. This act now restricted interlocking, certain

mergers and acquisitions, tie-in sales as well as directorships.

Now let us take a look at AT&T which was allowed to be a monopoly by the government

because it was a public utility. The government felt that having one phone company made the

market more efficient and they did not engage in price fixing so they were allowed to function as

a legal monopoly. It was not until the 1980’s under the Regan administration that AT&T’s

monopoly was broken up and new telephone companies emerged.

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Oligopoly vs. Monopoly

Certain monopolies are still allowed to function today such as power plants, and gas

companies as their utilities must come from one source. It would be too difficult for two

competing electrical companies to run different sets of electrical wiring or to differentiate whose

customers their companies supplied electricity too if they shared the wiring. The same with the

gas companies as two companies cannot run separate gas lines throughout a city.

Microsoft operating systems came under attack due to their non-coercive monopoly

which was due only to their superior product and brand loyalty from consumers. The funny thing

is that one of the main competitors who raised questions about Microsoft’s monopoly was

Google who will soon in my opinion face the same scrutiny due to their dominance of the web

search market.

As we can see there is a long history of monopolies here in America and we will continue

to see monopolies develop here in the future. As new emerging technologies, inventions and

other new markets develop. Those who gain an entry first can usually dominate those markets

and will be able to gain monopolies in those industries. Other firms with the capital to enter those

markets will compete with the top firm and in many cases eventually outperform and supersede

the top business in that industry. The consumer and market will be left with an oligopoly in that

market, with several top firms dominating that industry.

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Oligopoly vs. Monopoly

Resources:

Beattie, A. (2014) A history of U.S. monopolies. Investopedia. Retrieved on August 29, 2014

from http://www.investopedia.com/articles/economics/08/hammer-antitrust.asp

Bulow, J.I., Geanakoplos, J.D. and Klemperer, P.D.(1985). Multimarket Oligopoly: Strategic

Substitutes and Complements. Journal of Political Economy Vol. 93, No. pp. 488-511

Lowry, W. (2014). Why companies like Toyota lead in global automobile market share. Market

Realist. Retrieved on August 28, 2014 from

http://marketrealist.com/2014/04/companies-like-toyota-lead-global-automobile-market-

share/

Sharkey,William W., (1983). "The Theory of Natural Monopoly," Cambridge Books,

Cambridge University Press.

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