Mesenchymal stem cells (MSCs) have been considered as a potential source for cell-based therapies in arthritic diseases for both their chondrogenic and anti-inflammatory properties. Thus, we examined how MSC-based neocartilage responds to tumour necrosis factor alpha (TNF-α) compared to articular chondrocyte (AC)-based neocartilage. Since oxygen tension is altered in arthritic joints, we also examined how increased oxygen tension influences this process. Monolayer-expanded healthy human ACs and bone marrow MSCs were cultured in chondrogenic medium in three-dimensional culture under hypoxia. They were then exposed to TNF-α under hypoxic or increased oxygen tension. We found no inherent anti-inflammatory potential of MSC-derived neocartilage as it pertains to the enzymes studied here: more degradative enzymes were upregulated by TNF-α in MSCs than in ACs, regardless of the oxygen tension. MSCs were also more sensitive to reoxygenation during TNF-α exposure, as indicated by increased proteoglycan loss, increased aggrecanase-generated metabolites, and further upregulation of the major aggrecanases, ADAMTS4 and ADAMTS5. There was also evidence of matrix metalloproteinase (MMP)-mediated aggrecan interglobular domain cleavage and type II collagen loss in response to TNF-α in both MSCs and ACs, but more MMPs were further upregulated by reoxygenation in MSCs than in ACs. Our study provides further evidence that consideration of oxygen tension is essential for studying cartilage degradation; for example, neocartilage produced from MSCs may be more sensitive to the negative effects of repeated hypoxia/reoxygenation events than AC-derived neocartilage. Consideration of the differences in responses may be important for cell-based therapies and selection of adjunctive chondroprotective agents.