by Nita Tyson

Created on: August 28, 2009

When one company in an industry has become so large and strong that it chokes out its competition and ends up as the sole service provider in the industry, a monopoly has been created. An oligopoly appears similar on the surface since there may be only two or three service providers and little competition. When you look deeper, however, these two forms come from radically different market conditions. Monopolies exist because the free market has been choked out. Oligopolies exist only in a free market. In a monopoly, the sole provider names its price, because no one is around to compete with them. In an oligopoly, the service providers usually set up a friendly competition to try and increase demand for the product type in general.

The government tries to keep a close eye on monopolies, but it doesn't usually regulate oligopolies as closely. After all, the purpose of the oligopoly is to keep the market flowing, while the purpose of the monopoly is to choke the market out. It benefits the government to allow oligopolies a little more freedom.

Many times, a monopoly will develop because one company gets bigger and bigger and can offer many more advantages than smaller companies. The more small businesses the monopoly drives out, the more cost advantage there is to dealing with the monopoly. Eventually, the strongest company 'wins' and the consumer loses (in terms of choice). It is important to note, however, that the reality is that the consumer really may have gotten better service or better products from the larger company. Eventually the government breaks up the monopoly, opening up choices. An example of this was in the break up of the Bell Telephone systems many years ago, when the government broke up Ma Bell into a bunch of smaller companies. The consumer may have had more companies to choose from, but they paid for the choices in higher service fees and poor technical service. Clever readers are probably thinking "Wal-Mart" at this point, and wondering if a monopoly will develop and if Wal-Mart will put all the smaller chains out of business.

In an oligopoly, the companies compete and drive up each other's value. A good example of this is the competition between Coke and Pepsi. In creating a friendly if somewhat artificial competition, Coke and Pepsi drew attention to soda products and essentially opened the market to smaller competitors. The price for sodas dropped and the variety increased exponentially. Both companies and consumers "won" in this competition.

Monopolies can also develop as a result of governmental manipulation of the market. An example of this is the United States Postal Service (USPS), which is technically a private company chartered by the US Government to provide mail services. Only the USPS is legally allowed to deliver the US Mail, and competitors such as FedEx and UPS can only technically deliver packages.

For more information, check out Tutor2You, at http://tutor2u.net/economics/content/topics/monopoly /oligopoly_notes.htm

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