Both the monopolistic competition and oligopoly represent imperfect market structures that lie between the perfect competition and monopoly. While monopolistic competition is a little closer to a competitive market structure as it has a large number of competiting firms, oligopoly is nearer to the monopoly as the number of firms is very small and possibility of collusion (cooperation) to form a monopoly is always there. Both markets may have differentiated products and incur selling costs. While under oligopoly, the new firms may face stiff barriers to entry under monopolistic competition such entry may be unrestricted. However, the basic difference between these two types of markets is that a firm under monopolistic competition can make its own price and output decisions without bothering about how the others would react. This is possible because number of firms is quite large and the possible reaction of other firms on price and output of this firm will have only a minimal impact. But under oligopoly, there is only a few firms and thus price and output decisions of one are bound to substantially affect the others, and in turn, the reaction of others is bound to have affect on price and sales of this firm. Thus, the firm under oligopoly has to act strategically, while a firm under monopolistic competition is free from such constraints.
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