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It is suggested that oligopoly promotes innovation more than do other market structures. Given what you have learned about the four different market structures presented in your text (Perfect Competition, Monopoly, Monopolistic Competition, and Oligopoly), discuss the reasoning that might explain where innovation comes from

I could help you with this, I'm an economics graduate

perfect competition means that there are lots of people with the same resources fighting for being the best of them all. Being the best here means, making the most money out of the products in question.
However this cannot last in itsself if you dont limit the success/Money/resources for each of the competition.
There will be some who have success (over a long period of time) while others dont.
Perfect competition will in itsself be inefficient because the resources (money, knowledge, best people of the brance) will be split up on many different competitors. This is usually not how it stays, but even if it were the amount of resources would be splitted so much that the innovation would need to be cut, because the market would be satiated by many small players.
Per se perfect competition (in difference to monopolistic competition) means that a lot of people make the same product.
You can only be successfull with that if you lower the price. Innovation in a perfect competition will likely be limited to new ways of producing the product in order to reduce the costs.

Monopoly ofc is noninnovative of its own. If you are the only one selling a kind of a product, lets say pizza, then you would not have the need for variety.
Monopols are used to generate money, not used for innovation. Innovation is not needed to make money if you allready have a monopol.
That doesnt mean that monopolistic systems have NO innovation. But since there is (in true monopolistic systems) no NEED for innovation there usually is a lack of that there.

Monopolistic competitions are different. Here each company tries to get a monopol. Achieving that due to changes in their products (price, quality brand ...).
Here Innovation is needed. However doesnt pay so much, because it also must be marketed. Lets say you are making the biggest pizza. Not everyone wants that. And your niche in the market will be filled some time.
Your resources are limited and are used more to advertise and sell the products than a real need of innovation.
Monopolistic competition is also defined by competitors to have SUPTLE changes in their products. Which maybe innovative, but probably not much.

Oligopoly means you have only a small ammount of producers. Likely very strong ones who satiate the market.
Everyone of them wants to be the leader in the market and to get other companies out of the market.
Whereas in Monopolistic competition you can always use selling methods to sell your similar product, you will have problems doing that with strong competitors.
Your product is not cheaper then theirs is, or it doesnt have all the features theirs have and so on.
Competition is difficult. You need Unique selling points.
Your product needs to be cheaper AND better.
As an Oligopol you know the market and know what the customers want. You are also most likely well known in the branche and advertise your products only gets you so far (the market knows allready that they exist and what they can and cannot do).
Thus you need to stand out, better and cheaper. You can only do that by innovation.
For the customer affordable innovative features and add ons are your most likely way to gain more customers and keep the old ones on top, thus getting a bigger market chare.
Also if you want to enter a market with big players (and you are small) you wont get market chares if you do the same thing as everyone else.
(Why should the customer change the product, if yours isnt better?)
so your strategy is to be innovative.

(In reference to bolded) It's the opposite. Perfect competition is the benchmark upon which you measure efficiency. It's the definition of efficiency.

(In reference to bolded) Oligopolies don't compete on price, they differentiate their products, usually through marketing. If they competed on price, they would all end up selling at a lower cost until P = MC, rather than P > MC. So it would be bad for all oligopolists to compete on price. Hence the innovation.

Yes you are right. However in the real world (I'm working in a branche with oligopoles price matters. There's only room for innovation up to a certain amount.
But if the improvement costs too much you will have a niche but your overall market share will decrease unless it's an optional feature.

Ofc price matters if the customer buys 10.000 pcs or more. Innovative or no.

If companies didn't innovate, they would end up selling the exact same products, which would make them compete with each other's prices ( it would go lower of course ). Which means less profit for them. They are forced to innovate to keep profits higher and differentiate from competition.

This is illegal. The black market, so to speak.



This post was edited by Casey on Jul 23 2015 07:41pm