Managerial Economics Revision

Monopolistic Competition vs Oligopoly

To tell monopolistic competition from an oligopoly, focus less on “are products differentiated?” (both can be) and more on how many meaningful rivals there are and whether firms are strategically interdependent.

The clean diagnostic

1) Number of significant firms (and concentration)

• Monopolistic competition:many small-to-medium firms; no single firm’s actions noticeably affect the market.
  • Typical signs: low concentration, lots of close substitutes, small market shares.
• Oligopoly: a few large firms dominate; each firm’s moves materially affect rivals.
  • Typical signs: high concentration (e.g., top 4 firms hold a big share), a “big players” shortlist everyone watches.

2) Strategic interdependence (the biggest tell)

Ask: If Firm A cuts price or launches a feature, do Firms B/C/D respond quickly and predictably?

• Monopolistic competition: usually no—your decision mostly affects you.
• Oligopoly: yes—expect retaliation/matching, price wars, coordinated capacity moves, etc.

3) Barriers to entry and long-run profits

• Monopolistic competition: low entry barriers → in the long run, economic profit tends toward ~0 (firms compete it away).
• Oligopoly: higher entry barriers (scale, regulation, networks, patents, distribution, massive fixed costs) → profits can persist.

4) Nature of competition

• Monopolistic competition: mainly non-price competition (branding, small differentiation) + some pricing power but limited.
• Oligopoly: can be price (often sticky prices) and/or non-price (advertising, R&D, ecosystems), but always with rivals in mind.

Quick “field test” checklist

If you answer yes to most of these, you’re likely looking at an oligopoly:

• Can you name the top 3–6 firms instantly?
• Do they track each other’s pricing/features and match quickly?
• Are there entry barriers that stop many new competitors from scaling?
• Do you see capacity/quantity decisions mattering (plants, fleets, spectrum, stores)?

If instead you see many firms, easy entry/exit, and each firm is “too small to matter,” it’s closer to monopolistic competition.

Common confusion

• Product differentiation ≠ monopolistic competition.
  Oligopolies can be highly differentiated (e.g., smartphones, airlines).
• The key separator is “few dominant firms + interdependence” (oligopoly) vs “many firms + little interdependence” (monopolistic competition).

Examples from Sri Lanka

Here are Sri Lanka–specific, evidence-backed examples showing the difference in practice.

Monopolistic competition (many firms + differentiated offerings)

Example: Hotels & restaurants / tourism hospitality

Evidence that there are “many” competing firms

• Sri Lanka’s tourism statistics (SLTDA, reported in the Statistical Pocket Book 2025) show 5,681 “Hotels and Restaurants” establishments in 2024.
• The Economic Census (formal sector) also shows 3,873 formal establishments in “Accommodation and food service activities” (2013 baseline), indicating a large number of separate operating units rather than a few dominant players.

Why this fits monopolistic competition

• Many sellers (thousands of establishments), so any single restaurant/hotel has limited ability to move “the market.”
• Differentiation is central (location, cuisine, service quality, ambience, brand, ratings).
• Entry/exit is comparatively easier than in utilities/telecom (you don’t need spectrum rights or a nationwide network), so competitive pressure tends to be strong.

Oligopoly (few firms + high barriers + strategic interdependence)

Example A: Mobile telecommunications

Evidence of “few” firms + regulatory entry barriers

• TRCSL’s official telecom statistics list only 3 licensed “Cellular Mobile Telephone Operators”: Dialog Axiata PLC, Hutchison Telecommunications Lanka (Pvt) Ltd, and Mobitel (Pvt) Ltd.
• Independent reporting summarizing the sector also describes three main mobile service providers, and gives subscriber-scale evidence (e.g., Dialog ~17.2m subscribers as of March 2024; SLT-Mobitel and Hutch materially smaller), consistent with a market dominated by a few large players. (Freedom House)

Why this fits oligopoly

• High barriers to entry: licensing + spectrum + massive network CAPEX (implied by the need for formal TRCSL operator licences).
• With only a few firms, pricing, bundles, and network investments are strategically interdependent (moves by one operator matter to the others).

Example B: Domestic LPG cylinder supply

Evidence of a duopoly

• Reuters explicitly describes Sri Lanka’s LPG market as a duopoly, with Litro holding the largest share. (Reuters)
• Sri Lankan business reporting has repeatedly characterized the structure as Litro + Laugfs, with Litro typically reported as >70% share and Laugfs the remainder (often cited around ~20%). (Daily Mirror)

Why this fits oligopoly

• Very few suppliers (effectively two), plus infrastructure and regulatory constraints (import terminals, storage, distribution) make entry difficult—classic oligopoly conditions. (Reuters)