Monopolistic and Oligopolistic Competitions
Comparison between monopolistic competition and oligopolistic competition
Interest Rates
Monopolistic competition is a market structure where large number of firms sells differentiated products that are highly substitutes to one another but not perfect substitutes. There is a free entry and exist in the monopolistic competition, and the firms demand curves are downward sloping. Examples of a monopolistic competition are the firms producing clothing, toothpaste, restaurants etc. On the other hand, oligopolistic competition is a market structure where there are few firms competing among one another. There is a barrier of entry because of the economic of scale, patent, and the technology involved in setting up the firm and the presence of few firms give the firms advantage to make excess profits. Examples of oligopolistic competitive market structures are automobiles, steel, aluminium, petrochemicals, and electrical equipments. While there are few firms in the oligopolistic market, there are still competitions among firms. Example of the interest rates that the banks charge on loans reveals the competitive nature of the oligopolistic markets.
Interest rates are the prices that the banks charge for lending money to borrowers.
In the oligopolistic competitions, the interests rates that the bank charges large corporations for the short-term loans are called the prime rate. The changes in prime rates cause interest rates in the money markets to rise or fall substantially. The changes in the prime rates will make major banks to follow suit by changing their rates. The reactions of the major banks will make other banks to follow suit within few days. Changes in the interest rates will make the active banks to enter the market and non-active bank to exit the industry. (Totzek, 2011). In the long run, the firms in the oligopolistic market may form collusion to continue enjoy higher profits. For example, the interest rates charged by the commercial banks are very similar. The higher profits enjoyed by the commercial banks may not be affected with the change in the interest rates because major commercial banks charge the same interest rates on the money borrowed by customers.
However, in the monopolistic competitions, the increase...
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