Perfect Competition vs Oligopoly
Competition is very common and oftentimes very aggressive in a free market place where a large number of buyers and sellers interact with one another. Economics has differentiated among these types of competition, taking into account the products sold, number of sellers and other market conditions. These types of competition include: Perfect competition, imperfect competition, oligopoly, and monopoly. The following article explores two types of market competition: the perfect competition and oligopoly, and clearly explains what they mean and how they are different to one another.
What is Perfect Competition?
Perfect competition is where the sellers within a market place do not have any distinct advantage over the other sellers since they sell a homogeneous product at similar prices. There are many buyers and sellers, and since the products are very similar in nature, there is little competition as the buyer’s needs could be satisfied by the products sold by any seller in the market place. Since there are a large number of sellers each seller will have smaller market share, and it is impossible for one or few sellers to dominate in such a market structure.
Perfectly competitive market places also have very low barriers to entry; any seller can enter the market place and start selling the product. Prices are determined by the forces of demand and supply and, therefore, all sellers must conform to a similar price level. Any company that increases the price over competitors will lose market share since the buyer can easily switch to the competitor’s product.
What is Oligopoly?
An oligopoly is a market situation in which the marketplace is controlled by a small number of sellers that offer a similar product at a comparable price level. A good example of an oligopolistic market place would be the gas industry where a few number of sellers offer the same product to a large number of buyers. Since the products are so similar in nature, firms dominating within an oligopoly market will face intense competition from one another. This also means that such firms need to be aware of what other firms are doing differently from them, so that they can be ready to take competitive action if necessary. There are also high barriers to entry to such a market place since most new firms may not have the capital, technology and existing firms will take actions to discourage any new entrants in fear of losing market share and profits.
Perfect Competition vs Oligopoly
Perfect competition and oligopoly are market structures that are quite different to each other, even though both forms of market places offer similar products at similar prices levels. The main difference is that, in a perfectly competitive market place, the product is simpler and can be produced and sold by anyone; therefore there are fewer barriers to entry. On the other hand, in an oligopoly, the product sold is more complex and requires large capital, technology, and equipment which makes it different for new players to penetrate. The other main difference is that, firms in a perfectly competitive market are price takers and need to settle with the price at which the product is already being offered in the market. In contrast, firms that operate in an oligopoly market place are price setters and are able to control the price depending on the level of market power that they possess.
Summary:
• Perfect competition is where the sellers within a market place do not have any distinct advantage over the other sellers since they sell a homogeneous product at similar prices.
• An oligopoly is a market situation in which the marketplace is controlled by a small number of sellers that offer a similar product at a comparable price level.
• .The main difference is that, in a perfectly competitive market place, the product is simpler and can be produced and sold by anyone; therefore, there are fewer barriers to entry.
• On the other hand, in an oligopoly, the product sold is more complex and requires large capital, technology, and equipment which make it difficult for new players to penetrate.