It is the last assumption, regarding the independence of firms’ decision-making
that has attracted the most attention from economists. Many economists claim
for example that monopolistic competition is not really a distinct form of
market structure.10,11 This claim is based on the observation that firms are
typically faced with competition from a limited number of neighbouring
firms, with markets being segmented spatially. Segmentation may also be in
terms of product characteristics.
An example will illustrate this situation. The restaurant industry is not a
single market. An individual restaurant does not compete with all other
316 STRATEGY ANALYSIS
restaurants in the country, or even in the same town. It may compete with
other restaurants within a one-mile radius; furthermore, it may not compete
strongly with some of these restaurants because they are not seen as being
close substitutes. Thus an Indian restaurant may not compete with Italian,
French, Greek or Mexican restaurants to any great degree. This degree of
competition can be examined empirically by measuring the cross elasticity
of demand. Of course, it can be argued that if there are few competitors then
the product is not slightly differentiated, as required in monopolistic competition,
but highly differentiated. However, regardless of how the assumptions of
monopolistic competition are violated, it seems that in view of these factors it
is often preferable to consider firms in many situations as being involved in a
system of intersecting oligopolies, with low entry and exit barriers.
It is to oligopoly that we must now turn our attention. However, before
doing this, it is useful to consider a situation that has received much attention
in the media lately, since it relates to price-fixing and cartels. The situation is
examined in more detail in Chapter 12, when competition policy is discussed,
but it is appropriate to consider certain aspects in the current context.