How imperfect can imperfect competition get? The most extreme case is monopoly: a single seller with complete control over an industry. It is only firm producing in its industry, and there is no industry producing a close substitute.
True monopolies are rare today. Indeed, they typically exist only with some form of government protection. For example, a pharmaceutical company, which discovers a new wonder drug, will be granted a patent, which gives it monopoly control over that drug for a number of years. Another important example of monopoly is a franchised local utility, such as firm that provides your electricity or water. In such cases there is truly a single seller of a service with no close substitutes.
The term oligopoly means few sellers. Few in this context, can be a number as small as 2 or as large 10 or 15 firms. The important feature of oligopoly is that each individual firm can affect the market price. In the airline industry, the decision of a single airline to lower fares can set off a price war, which brings down the fares charged by all its competitors.
True monopolies are rare today. Indeed, they typically exist only with some form of government protection. For example, a pharmaceutical company, which discovers a new wonder drug, will be granted a patent, which gives it monopoly control over that drug for a number of years. Another important example of monopoly is a franchised local utility, such as firm that provides your electricity or water. In such cases there is truly a single seller of a service with no close substitutes.
The term oligopoly means few sellers. Few in this context, can be a number as small as 2 or as large 10 or 15 firms. The important feature of oligopoly is that each individual firm can affect the market price. In the airline industry, the decision of a single airline to lower fares can set off a price war, which brings down the fares charged by all its competitors.
