The capitalist market structure, in which today’s world is rapidly moving into brings with a diverse kind of economic market structure that has different kinds emerging out of the system to operate in a laissez faire or free market economy. The debate between which one these structures is better is an ongoing and to some extent never ending debate where each side has different points to argue with and for. So if one is to go by the books, a straightforward comparison of two of the commonly seen market structures, i.e., perfect competition and oligopoly have been discussed here.
Oligopoly is a market structure in which there is neither perfect competition nor monopoly rather a small group of firms operate in a saturated market where competition among them exists. There are a few numbers of firms or sellers in oligopoly with respective market share for an-almost homogenous product. In oligopoly forms are independent decision makers however, the decision of one firm effects the market share of all the other firms so if one firms decide to lower the market price of its commodity, all other firms have to follow the lead as the product they all offer is easily substitutable and price derives demand thus making them vulnerable to price changes. Some of the characteristics of oligopoly are fewer number of sellers, close-to-perfect knowledge of the market, interdependence of firms, price rigidity since there is little room to increase or decrease price substantially, elements of monopoly, barriers to enter the market since consumer preferences and other features drive this market structure and an ever-present chance of collision and thus formation of cartel.
On the other hand, perfect competition is the idealistic version of an economic market structure where there exists a perfect competition among a large number of sellers catering to the needs of large number of buyers with a perfect homogenous product. There is perfect market knowledge to buyers as well as sellers, perfect resource mobility, no barriers to enter or exit the market and little control over price making. Since perfect competition is more of an idealistic concept, we see an altered version of this structure in application where close to perfect competition exists in real life economic market situation.
In perfect competition there are a large number of sellers producing the identical product for a large number of buyers. Whereas in oligopoly few sellers cater to saturated market of buyers with homogenous or differentiated products, with difference being made in packaging composing or branding etc to attract consumers.
Firms operating in perfect competition are price takers who sell identical products with little control on price, which mean with high level of competition there is little influence of firms over price as price is set by the demand of buyers. This appeals to the buyers more than to the sellers since buyers can buy the commodity at a relatively lower price in comparison to other market structures.
Oligopoly is the mid way where few firms (when not colluding) set a price higher than their costs but not very high as to obtain super normal profits as in the case of monopoly. With homogenous or differentiated products, buyers have a choice to choose the products from firms where all tend to maximize profit so prices are set low as to capture market share. However, since there are barriers to enter the market and not perfect information is available, oligopolies tend to be price rigid. It is in the benefit of buyers as well as consumers to regulate oligopolies a little so that firms could derive maximum profits they can and buyers can switch to a substitute with lower price if one firms increase the price of its commodity.
Firms operate on the function of marginal revenue equals marginal cost MR=MC. Oligopolies tend to set price higher than the cost and obtain abnormal profits in the long run which keeps the economy strong and money circulating. Close to perfect competition sets price almost equals to cost and thus little profit is made where in long run the only incentive is to derive the cost down.
So no matter what the verdict is as of which market structure is better, there are various pros and cons of each of these structures which are inherent to them.
