Revision note
Market Structures: Monopolistic Competition and Oligopoly
A revision note for distinguishing two market structures using firm numbers, strategic interdependence, entry barriers and dated Sri Lankan examples.
Study context
Independent learning material
This resource was prepared for study and revision. Any named institution describes the programme context; it does not imply that the institution published, endorsed or maintains this page.
Market structure affects how prices, output, quality and investment may respond to a firm’s decisions. In health economics, the same reasoning can help examine pharmaceutical supply, insurance, hospitals, diagnostic services and regulated provider markets. The first task is to define the relevant product and geographic market; an industry label alone is too broad for a defensible competition assessment.
This independent postgraduate study note is not an official University resource. The Sri Lankan examples illustrate the concepts using evidence available up to 14 August 2026. They are not findings by a competition authority, and they should be updated before being used as current market evidence.
Monopolistic competition and oligopoly
Product differentiation does not separate the two structures because both can contain differentiated products. The stronger distinction concerns the number of meaningful rivals and whether each firm must anticipate the reactions of a small set of competitors. OpenStax characterises oligopoly through mutual interdependence: decisions about price, output and advertising depend on what other firms do.
| Diagnostic feature | Monopolistic competition | Oligopoly |
|---|---|---|
| Significant firms | Many firms, each usually small relative to the relevant market | A few firms account for a substantial part of the relevant market |
| Strategic interdependence | A single firm’s action usually has a limited direct effect on each rival | Each major firm has reason to anticipate rival responses |
| Entry conditions | Entry is relatively open under the textbook model | Scale, sunk cost, networks, regulation or scarce inputs may restrict entry |
| Differentiation | Common | May be weak or extensive |
| Long-run model | Entry tends to erode economic profit under the model’s assumptions | Economic profit may persist, but it is not guaranteed |
A practical diagnostic
Ask four questions:
- What is the relevant product and geographic market?
- How many firms exert a meaningful competitive constraint, and how stable are their positions?
- Would a price, output, quality or investment decision by one major firm predictably affect the others?
- What creates barriers to entry or expansion—licensing, spectrum, scale, sunk infrastructure, distribution, finance or customer switching costs?
A short list of firms is suggestive, not conclusive. The OECD’s competition-measurement review warns that concentration and competition are related but distinct. A concentrated market may still face effective entry pressure, while coordination can arise in a less concentrated market. A proper assessment may require market shares, concentration ratios, entry and exit data, prices, margins and evidence of firm conduct.
Common errors
- Treating differentiation as decisive. Airlines, mobile networks and medicines can be differentiated within oligopolistic markets.
- Equating many establishments with effective competition. Local markets or specialised segments may still be concentrated.
- Equating concentration with unlawful conduct. Oligopoly describes structure; it does not prove collusion or abuse.
- Using a national industry count without defining the market. A consumer may face a much narrower local or product-specific set of alternatives.
Examples from Sri Lanka
Tourism hospitality: a cautious illustration of monopolistic competition
Sri Lanka’s Department of Census and Statistics reports a provisional 5,681 “Hotels and Restaurants” establishments in 2024, with 176,236 people employed in that category. The table attributes the figures to the Sri Lanka Tourism Development Authority and appears in the Statistical Pocket Book 2025, Table 14.2.
The large establishment count and differentiation by location, service, cuisine, quality and brand make hospitality a useful introductory example of monopolistic competition. The evidence does not prove that every hospitality market is unconcentrated. The administrative category is broad, the figure is provisional, and a luxury-resort market in one destination may have a different structure from the national restaurant sector.
Mobile telecommunications: structure consistent with oligopoly
As checked on 14 August 2026, the Telecommunications Regulatory Commission of Sri Lanka’s system-licence register listed three mobile operators:
- Hutchison Telecommunications Lanka (Pvt.) Ltd.;
- Dialog Axiata PLC; and
- Mobitel (Pvt.) Ltd.
Three licensed national operators, combined with spectrum access and the sunk cost of network infrastructure, are consistent with an oligopolistic structure. The register establishes operator identity and licence status, not market shares, prices or strategic responses. A full assessment would need subscriber or revenue shares, entry conditions and evidence of conduct in a defined mobile-service market.
Domestic LPG: a dated duopoly example
On 8 July 2024, Reuters described Sri Lanka’s LPG market as a duopoly. LAUGFS Gas continues to publish financial and corporate records through its investor-relations page, confirming its LPG operations, but those company materials do not independently establish a current national market share.
This is therefore a dated illustration, not a 2026 share estimate. Import terminals, storage, cylinder fleets and distribution networks plausibly create substantial entry costs, but the reviewed public evidence does not support assigning a current percentage to either supplier. A current competition assessment should obtain regulator-grade sales volumes, import data and ownership information before classifying the market quantitatively.
Apply the framework to a health market
For revision, select one Sri Lankan health market—such as private laboratory testing, retail pharmacies or a specific medicine—and work through the diagnostic without assuming the answer:
- define the service, substitutes and geographic boundary;
- list providers using an official register where possible;
- distinguish provider count from market share;
- identify legal, capital and professional entry requirements;
- look for evidence of price, quality and capacity responses; and
- state what the available evidence cannot determine.
The objective is a bounded analytical conclusion. “The available register shows few licensed firms and substantial entry requirements, which is consistent with oligopoly” is stronger than declaring a market uncompetitive without evidence of shares or conduct.