Final answer:
Monopolistic competition is characterized by a large number of sellers offering differentiated products, leading to relatively low barriers to entry. In contrast, an oligopoly features a small number of dominant firms that control the majority of the market share, resulting in higher barriers to entry.
Step-by-step explanation:
Monopolistic competition and oligopoly represent distinct market structures with key differences. Monopolistic competition involves numerous sellers offering products that are slightly differentiated, allowing for a degree of pricing power for each firm. In this scenario, product differentiation and relatively low entry barriers encourage new firms to enter the market.
On the other hand, an oligopoly is characterized by a small number of large firms dominating the market. These firms often exhibit interdependence in their decision-making, as each one's actions significantly impact the others. The concentration of market power in the hands of a few players leads to higher entry barriers, making it challenging for new competitors to enter and establish themselves in the industry.
In monopolistic competition, firms have more freedom to set prices due to product differentiation and the presence of substitutes. This contrasts with oligopoly, where firms must consider the potential reactions of their few competitors when making pricing decisions. The strategic interactions among oligopolistic firms often result in pricing strategies such as collusion or price leadership.
In summary, monopolistic competition is characterized by a larger number of sellers, lower entry barriers, and more freedom in setting prices due to product differentiation. In contrast, oligopoly involves a small number of dominant firms, higher entry barriers, and strategic interdependence among competitors, influencing pricing decisions in the market.