What is the Difference between Monopoly and Oligopoly?

Among the market, there are four types of market structure. These include perfect and monopolistic competition, oligopoly and monopoly. Both monopoly and oligopoly are the types of market structure that exist within the market. Monopoly is a market structure that happens when a single company starts dominating the market by creating a USP. In an oligopoly, more than one company controls the market. 

Table of Contents

• Difference between Monopoly and Oligopoly
• What is Monopoly?
• Types of Monopoly
• Natural Monopoly
• Geographic Monopoly
• Technological Monopoly
• Government Monopoly
• Legal Monopoly
• What is Oligopoly?
• Types of Oligopoly
• Perfect Oligopoly
• Imperfect Oligopoly
• Open Oligopoly
• Closed Oligopoly
• Partial Oligopoly
• Full Oligopoly
• Collusive Oligopoly 
• Non-collusive Oligopoly 
• Tight Oligopoly
• Loose Oligopoly
• Characteristics of Oligopoly

Difference between Monopoly and Oligopoly

The following table indicates the differences between monopoly and oligopoly:

What is Monopoly?

Monopoly can be considered as the absence of competition. Within the monopoly market structure, a particular company becomes dominant with its product or service that has a unique selling point. A single company becomes the only supplier of a specific product or service. One example is Google which dominates the internet. The word 'Google' has become the synonym for 'search'. Whenever we want to search for something on the internet; very casually we think 'let's google it'.  When someone files a patent, that company becomes the monopoly of that service. Surf and Maggi have created monopolies within India over the years.  In some countries such as the U.S., antitrust legislation prevents the creation of monopolies.

Types of Monopolies

While you have gained a basic understanding of what is a monopoly, let us now learn about its types.

1. Natural Monopoly

This type of monopoly is formed when an industry or the sector has high start-up costs and a lot of barriers to entry within the industry. A natural monopoly may be the only company that provides a specific product or service within an industry or geographic location. Natural monopolies usually exist in an industry with unique raw materials or technologies. Power companies or oil agencies are categorised as natural monopolies. 

Characteristics of Natural Monopoly

A natural monopoly has the following characteristics:

1. These are naturally occurring within an industry.
2. Natural monopolies occur in industries with high barriers to entry such as physical and geographical barriers.
3. The fixed cost of the business is very high and a lower marginal cost.
4. A natural monopoly is a single firm that provides a single product or service.

2. Geographic Monopoly

This type of monopoly occurs when a business is dominating a particular location. The company is offering its products and services in a particular location. A geographic monopoly is formed when a company holds the entire market for a particular product or service. This happens when a market is so small or limited that there is no place for other sellers to enter the market. Water supply, postal services or electricity distribution companies become geographic monopolies over time.

Characteristics of Geographic Monopoly

A geographic monopoly has the following characteristics:

1. A geographic monopoly is the sole provider of a product or service in a specific geographic area.
2. It occurs in remote areas where multiple businesses are not supported.
3. The monopoly controls the prices and supply due to less or no competition. 

3. Technological Monopoly

This is a monopoly type that occurs when a single firm controls the methods of manufacturing required for producing a product. This type of monopoly has rights over the technology that is used for manufacturing the product. Microsoft, Tesla, Amazon, Apple and Facebook are some of the biggest technology monopolies in the country. 

Characteristics of Technological Monopoly

A technology monopoly has the following characteristics:

1. A technology monopoly creates something with unique capabilities within the market. These capabilities must be difficult to produce. 
2. The product developed by a technology monopoly has network effects. This means that the value of the product is directly proportional to the number of people using it.
3. The product must have the 'economies of scale' characteristics. When the product becomes more economical to produce, it allows scaling up the operations.

3. Government Monopoly

Also known as state monopoly, this type of monopoly is created, operated and owned by the government. In such a monopoly, the government is the sole provider of a specific good or service. Such a monopoly is created due to national security, public services and regulatory control. Telephone, natural gas supply, power generation and other public utility companies become government monopolies. Such monopolies are also created to regulate the monopolistic market to prevent monopolies from setting excess prices.

Characteristics of Government Monopoly

A government monopoly has the following characteristics:

1. A government monopoly has commercial behaviour which is not impacted by the competitive pressure of private organisations. 
2. Government monopoly acts anonymously of its competitors and potential competitors.
3. A government monopoly has the capability to increase the price as well as the quantity of goods and services provided.
4. State monopoly can reduce the service value or impose restrictive terms and conditions without losing market share. 

4. Legal Monopoly

Legal monopoly is also known as 'statutory monopoly'. A company becomes a legal monopoly when it operates as a monopoly as per the government mandate. This type of monopoly provides products and services at regulated prices. Legal monopoly can run either independently or be regulated by the government. This monopoly type is favourable for both the government and its citizens. The East India Company was an example of a legal monopoly.

Characteristics of Legal Monopoly

• A legal monopoly offers a specific product or service at a regulated price. 
• It can run both independently and as per government regulations.
• Legal monopoly helps the government in regulating prices in its sector. 
• A legal monopoly helps the government create a balance of price and controls demand and supply.

What is Oligopoly?

An oligopoly is a market structure where two or more sellers sell in the market. There is no upper limit to several firms that can exist in an oligopoly. However, the number should be low enough that the actions of one company can significantly influence other companies. This market structure has imperfect competition since the competition is between a few companies. These are a small number of firms that control the market. In such a market structure, any action by even a single company affects the others. If one company lowers the price, then others will also lower the price to compete. Airlines can be considered an oligopoly. When one airline lowers the price, other airlines are forced to reduce the price to stay in competition.

Types of Oligopoly

Oligopoly has different types which are classified as follows:

1. Based on products:
• Perfect Oligopoly
• Imperfect Oligopoly
2. Based on the entry of firms:
• Open Oligopoly
• Closed Oligopoly
3. Dominance:
• Partial Oligopoly
• Full Oligopoly
4. Cooperation: 
• Collusive Oligopoly 
• Non-collusive Oligopoly 
5. Concentration:

• Tight Oligopoly
• Loose Oligopoly

1. Based on Products

Oligopolies are categorised based on the products that are manufactured within them. If all the firms in an oligopoly produce the same type of products, they are categorised within a perfect oligopoly. A closed oligopoly includes firms where different types of products are manufactured, it is considered as an imperfect oligopoly.

1. Perfect/Pure oligopoly: A perfect or pure oligopoly is formed when the firms in an oligopoly market structure manufacture homogenous products. Industries such as aluminium, steel and cement are examples of perfect oligopoly.
2. Imperfect oligopoly: In an imperfect oligopoly, firms produce heterogeneous commodities. An imperfect oligopoly is created within an industry that offers several products and services to its customers. For example, service and manufacturing industries are considered as imperfect oligopolies.

2. Based on Firms Entry

Based on the entry of firms, an oligopoly is categorised as an open and closed oligopoly. If the oligopoly easily allows firms to enter in the market, it is an open oligopoly. In case, the oligopoly makes it difficult for firms to enter its market, it is considered as a closed oligopoly.

1. Open oligopoly: In an open oligopoly, any firm can enter market and compete with existing firms. This makes the open oligopoly a more dynamic competitive environment. There are less barriers to entry compared to a closed oligopoly. Barriers include initial capital investment, technology, regulatory hurdles and economies of scale.
2. Closed oligopoly: In this oligopoly, there are prominent barriers to entry that prevent firms from entering in market easily. Consumer loyalty to existing brands and high investment requirements are some of the strong barriers to entry in a closed oligopoly.

3. Based on Dominance

There are two types of oligopoly based on dominance. One is partial and the other one is full oligopoly. In partial oligopoly,  a single company dominates the oligopoly in terms of price setting and market trend. A full oligopoly does not allow any single-price leader.

1. Partial Oligopoly: This is a type of oligopoly in which the price and direction of the market are dominated by a single company. The price-setting company produces a high percentage of the total output due to which it has a large influence on the market conditions. This company is considered the leader in the partial oligopoly. The rest of the companies follow this leader. In a partial oligopoly, firms are able to price-make instead of price-take.
2. Full Oligopoly: In this type of market structure, there is no price leader in the market. All the firms within a full oligopoly have similar control over the market.

5. Based on Cooperation

1. Collusive Oligopoly: Also known as cooperative oligopoly, in such a market structure, the firms together determine the price. All firms avoid competition through a formal agreement and thus, form a cartel. Hence, there is cooperation for price of product classes and homogeneous products. Due to this cooperation, firms in a collusive oligopoly maximise profits above the normal market equilibrium. In this oligopoly, interdependence is less. A leading firm is considered as the price leader. 
2. Non-collusive Oligopoly: In a non-collusive oligopoly, firms act independently within the market. Every firm independently determines the product price and has their independent output policy. Due to this independence, every firm tries to increase the market share through competition. Such a market has high competition. This oligopoly has few firms in the market. 

5. Based on Concentration

Oligopolies categorized based on concentration are tight and loose oligopolies. If a market is highly concentrated due to fewer leading firms, it is a tight monopoly. In case, the market has more competing firms, the market becomes less competitive and thus, loose oligopoly. These types of oligopolies are distinguished because of their four-firm ratio. A four-firm ratio measures the percentage market share of the top four firms within the industry. A high four-firm ratio indicates less competition. A less four-firm ratio indicates higher competition.

1. Tight Oligopoly: In a tight oligopoly, few firms dominate the market. These firms have a large market share. This makes the market highly concentrated and less competitive. In this market structure, the four-firm concentration ratio is higher than 60 due to which there is lesser competition in a tight oligopoly.
2. Loose Oligopoly: There are many interdependent firms within a loose oligopoly. In such a market structure, the four-firm concentration is between 40-60, which makes it a highly competitive market space. Firms within tight oligopolies are involved in product differentiation strategies. This helps them distinguish the firm's products and services from its competitors. It ultimately helps in building customer loyalty.

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Characteristics of Oligopoly

An oligopoly has the following characteristics:

1. Oligopolies arise in an industry with a small number of influential players.
2. None of the companies within an oligopoly can effectively push out the others.
3. Oligopoly is capital intensive and has many barriers to entry such as regulation and IPR protection.
4. Due to high barriers in most oligopolies, most firms are unable to enter an oligopoly.
5. Prices in an oligopoly market structure are moderate because of competition. 
6. As compared to the free market, the prices are relatively higher.
7. Oligopolies show interdependence. Due to this reason, oligopolistic firms consider all possible reactions of competing firms and their countermoves. A collusive oligopoly has less interdependence. 
8. Due to interdependence, price rigidity is common in homogeneous/perfect oligopolies. Firms know that changing the price would be aware of its competitors and they will also lower the price.
9. In an oligopoly market, firms with the lowest cost set the price for every competitor.
10. It is not possible to determine the demand curve within oligopolies.