Comparative Analysis of Oligopoly and Monopoly

Introduction

This essay will briefly explain the different market structures as well as evaluate their advantages and disadvantages. It will link the theory and case study of market structures and there will be two main market structures, oligopoly, and monopoly, that will be explained while linking the case study on Apple and Spotify. This report will explain how the disadvantages of monopoly give way to oligopolies and how the disadvantages of oligopolies give way to monopolistic competition.

Market structures

Defined as the amount of competition that exists in the market between the different producers (Palmer and Hartley, 2012). “A market involves the exchange of goods and services between producers and consumers and it includes goods and services that are considered substitutes” (Harrison, 2014). Durkheim (2013) states that the number of businesses competing in a market is arguably the most important to determine the profitability of each of them. Barriers for entry and exit into a market can depend upon the profit or loss in that specific market. To further explain, when looking at the case study, Spotify was the first and leading provider for consumers in the music market. Due to the success and profit that Spotify acquired, Apple decided to launch Apple Music to rival them. Before Apple ventured into the music market they were a monopoly in the smartphone market. The same applies to Spotify, who was an oligopoly in the music market. Once Apple joined, they both became the two top leading providers to consumers in the music market,

Monopoly

Monopolies exist when there is only one supplier or one producer for a certain market (The Economic Times, 2019). There are no substitutes for these goods so they have abnormal profits in the long-run (Palmer and Hartley, 2012). Due to the high entry barriers such as high-cost, this discourages new companies to be established. It can be argued that Apple was a monopoly back in 2014. Apple controlled a large share of the smartphone market. The first advantage of monopolies is technological advantages. The majority of consumers in the smartphone market were using Apple smartphones because they had technological advances. The second advantage is that monopolies have high economies of scale and high output levels, because of this any new entries to the market will be driven out due to the large market share that these monopolies control. By acquiring a large market share, monopolies have complete control of the distribution process to the market. This develops into brand loyalty. When applying this to the case study we can see that both Spotify and Apple Music reached a point of nash equilibrium. This is where neither firms were going to lower their prices as they risk not making enough profit to keep them in the lead of their competitors. Now both of them were offering their consumers the same service at the same price. However, the reason why they are both successful and do not have a large difference in that success is due to brand loyalty (BBC News, 2015). Spotify users were not going to abandon the subscription that they have had for a long time and Apple users, as well as previous iTunes users, were going to stay loyal and use Apple Music. However, this can create drawbacks. Being a monopoly means setting the price for a certain product and not have any competition. This could mean that consumers are actually paying much more than what the product is actually worth. Another disadvantage of monopolies is the high control of the market. This means that firms will not improve or better themselves because they are comfortable with the brand loyalty that they have with customers. They may spend less on research and development, not improve their efficiency and set high prices (Palmer and Hartley, 2012). These disadvantages give way to oligopolies.

Oligopoly

An oligopoly is when the market is dominated by a relatively small number of sellers (tutor2u, 2019). They are generally found in sectors where there are economies of scale and more competition. There is no formal agreement to keep the prices the same but one dominant company sets the price for the consumers and usually, other companies follow. In this case, Spotify was the dominant company in the market and we can see that Apple followed the set price. BBC News (2015) stated that Apple Music will, “offer users a three-month free trial, after which it will cost the same as market leader Spotify.” This is called dominant price leadership. An advantage of oligopoly is if a company is doing well overseas, in the domestic market, that profit can be used to offset in the international market. The disadvantage of an oligopoly is that it is not in the interest of the consumer. If there are economies of scale they should be reflected in the price set. This disadvantage gives way to monopolistic competition. In this case study, Spotify competes in their respective streaming markets with Apple in an oligopoly market. Spotify could benefit from Apple’s price frailties as they can achieve price stability. These benefits enable consumers to begin planning the necessary expenses in order to reduce their indebtedness (Chief, 2019). Spotify has thus retained its ever-increasing consumer revenue margin, providing more styles of artists than Apple music. As few participants in markets compete for consumers, companies are encouraged to provide the best information possible to attract considerable attention to their products and services. In this situation, it can be argued that Apple wants to sell itself as a better brand than its competitors, such as Spotify. That might be why Spotify draws more users and more people into Apple music, as Apple needs to focus on its other products like its mobile devices, watches and more. This could be the main factor in Apple. It isn't surprising, as Spotify says in the case study, that it raised $526 million (£ 334 million) of new funds and was now estimated at $8.5 billion.

Monopolistic competition

Monopolistic competition is a structure of the market that combines monopoly elements with competitive markets (Pettinger, 2019). A monopolistic competitive market is one with freedom of entry and exit, but businesses can differentiate between their goods. This links to the case study as streaming music is now available on multiple platforms, some users will like to hear their music on sites like YouTube, the world's largest video sharing network. This is all because of the drawbacks of the monopolies and oligopolies, which have made the market into a monopolistic competition. Studies show that the UK streaming market will be expected to grow by 5-7% every year, reaching £1.1bn in 2023. It implies the market is growing annually, allowing new companies to enter the world of the streaming of music. One of the greatest advantages created by the monopoly market is that it offers greater choice and variability to consumers as opposed to the single provider monopoly market. Nonetheless, these various options for the consumer may be investigated since they may be lost as the market eventually is saturating and excess capacity is due, in other words, some of these entrants may represent the competition in the market as a dead weight. It can be argued that society is likely to benefit from its different tastes and expectations.

Conclusion

To conclude, monopolistic competition has many buyers and products, sells different products and there is a level of freedom to enter and exit the market as well as a high level of competition. Oligopoly has a few sellers, many buyers and provides different products with high barriers to entry and high competition. Monopoly has one seller, lots of buyers and no substitution with products so consumers all forced to use the service provided or buy the product. It has high barriers to entry and little to no competition. To further sum up monopolies help big business such as Apple Music in a monopolistic market to increase sales and profit, consumers might also turn away due to the monopoly cost of pricing, because they are the sole suppliers in the industry. This helps oligopolies form because, for a reasonable price, they can address this problem by offering the same products and services. But it might also open the door for more entrants, because in this situation Amazon, YouTube and more would be strong competitors to enter the market. Monopolistic competition provides low entry barriers, leading to heavy competition on the market, therefore causing an improvement in consumer choices.

Bibliography

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