Read this chapter to learn about monopolistic competition. Make sure to distinguish the short-run from the long-run model. The key difference between perfectly competitive markets and monopolistically competitive ones is efficiency. Differentiate between monopolistic competition and perfect competition Perfect competition and monopolistic competition are two types of economic markets. One of the key similarities that
perfectly competitive and monopolistically competitive markets share is elasticity of demand in the long-run. In both circumstances, the consumers are sensitive to price; if price goes up, demand for that product decreases. The two only differ in degree. Firm's individual demand curves in perfectly competitive markets are perfectly elastic, which means that an incremental increase in price will cause demand for a product to vanish). Demand curves in monopolistic competition are not perfectly
elastic: due to the market power that firms have, they are able to raise prices without losing all of their customers.6. Monopolistic Competition Compared to Perfect Competition
Learning
Objectives
Key Takeaways
Key Points
Key TermsSimilarities
Demand curve in a perfectly competitive market: This is the demand curve in a perfectly competitive market. Note how any increase in price would wipe out demand.
Also, in both sets of circumstances the suppliers cannot make a profit in the long-run. Ultimately, firms in both markets will only be able to break even by selling their goods and services.
Both markets are composed of firms seeking to maximize their profits. In both of these markets, profit maximization occurs when a firm produces goods to such a level so that its marginal costs of production equals its marginal revenues.
Differences
One key difference between these two set of economic circumstances is efficiency. A perfectly competitive market is perfectly efficient. This means that the price is Pareto optimal, which means that any shift in the price would benefit one party at the expense of the other. The overall economic surplus, which is the sum of the producer and consumer surpluses, is maximized. The suppliers cannot influence the price of the good or service in question; the market dictates the price. The price of the good or service in a perfectly competitive market is equal to the marginal costs of manufacturing that good or service.
In a monopolistically competitive market the price is higher than the marginal cost of producing the good or service and the suppliers can influence the price, granting them market power. This decreases the consumer surplus, and by extension the market's economic surplus, and creates deadweight loss.
Another key difference between the two is product differentiation. In a perfectly competitive market products are perfect substitutes for each other. But in monopolistically competitive markets the products are highly differentiated. In fact, firms work hard to emphasize the non-price related differences between their products and their competitors'.
A final difference involves barriers to entry and exit. Perfectly competitive markets have no barriers to entry and exit; a firm can freely enter or leave an industry based on its perception of the market's profitability. In a monopolistic competitive market there are few barriers to entry and exit, but still more than in a perfectly competitive market.
Difference Between Perfect Competition vs Monopolistic Competition
Perfect competition is a market structure in which there are numerous sellers in the market, selling similar goods that are produced/manufactured using a standard method and each firm has all information regarding the market and price, which is known as a perfectly competitive market. Monopolistic competition is a type of imperfect market structure. In a monopolistic competition structure, a number of sellers sell similar products but not identical products. Products or services offered by sellers are substitutes of each other with certain differences. A market can be described as a place where buyers and sellers meet, directly or through a dealer for transactions.
Flowchart shows Market Structure
What is the Perfect Competition?
- The entry and exit to such a market are free.
- This is a theoretical situation of the market, where the competition is at its peak.
- The firms don’t have price control, so they don’t have a pricing policy. The buyer or seller doesn’t have control over prices. Therefore, a seller has to accept prices determined by market supply and demand forces.
- The product offered by all sellers is the same in all respect so no firm can increase its price and if a firm tries to increase the price then it will lose its all demand to the competitors.
What is Monopolistic Competition?
- Monopolistic competition has features of both the market structures perfect competition and monopoly. This kind of market structure is found in real life.
- Firms are selling products with certain differences in quality, quantity, etc features, so firms have pricing control and pricing policies of firms that are in place.
- Entry and exit into the industry are easy because of fewer barriers.
- Product differentiation is one of the features of monopolistic competition, where products are differentiated from each other on the basis of quality or brand.
- One of the differentiating parameters of monopolistic competition is, it has a Highly elastic demand curve.
Just a few examples of monopolistic competition include:
- Bars/nightclubs
- Coffee shops
- Grocery stores
- Pharmacies
- Gas stations
- Hotels
- Hardware/home improvement stores
- Furniture stores
- Landscaping/lawn care services
- Car washes
- Automotive service companies
- Dry cleaners
Monopolistic competition is a practical example of a market scenario, it can be seen around us. Types of products or services provided by each market participant are differentiated. Products or services can be differentiated in many ways such as brand recognition, product quality, value addition to products or services or product placing, etc.
Perfect Competition vs Monopolistic Competition (Infographics)
Below is the top 10 difference between Perfect Competition and Monopolistic Competition:
Key differences between Perfect Competition vs Monopolistic Competition
Both Perfect Competitions vs Monopolistic Competition are popular choices in the market; let us discuss some of the major Difference Between Perfect Competition and Monopolistic Competition:
- A market structure, where there are numerous sellers, selling close substitute goods/services to the buyers, is monopolistic competition. A market structure, where there are many sellers selling similar products/services to the buyers, is perfect competition.
- In perfect competition, the product offered is standardized whereas in monopolistic competition product differentiation is there.
- In monopolistic competition, every firm offers products at its own price. In perfect competition, the demand and supply forces determine the price for the whole industry and every firm sells its product at that price.
- Entry and Exit are comparatively easy in perfect competition than in monopolistic competition.
- In monopolistic competition, average revenue (AR) is greater than the marginal revenue (MR), i.e. to increase sales the firm has to lower down its price. On the other hand, the average revenue (AR) and marginal revenue (MR) curve coincide with each other in perfect competition.
- Monopolistic competition, that exists practically. On the other hand, perfect competition is an imaginary situation that does not exist in reality.
- The demand curve as faced by a monopolistic competitor is not flat, but rather downward-sloping, which means that the monopolistic competitor can raise its price without losing all of its customers or lower the price and gain more customers. Since there are substitutes, the demand curve facing a monopolistically competitive firm is more elastic than that of a perfect competition where there are no substitutes. If a monopolist raises its price, some consumers will choose not to purchase its product—but they will then need to buy a completely different product. However, when a monopolistic competitor raises its price, some consumers will choose not to purchase the product at all, but others will choose to buy a similar product from another firm. If a monopolistic competitor raises its price, it will not lose as many customers as would a monopoly competitive firm, but it will lose more customers than would a monopoly that raised its prices.
Perfect Competition vs Monopolistic Competition Comparion Table
Below is the topmost Comparison between Perfect Competition vs Monopolistic Competition are as follows –
Basic of Comparison | Perfect competition | Monopolistic Competition |
Number of seller/buyers | Many | Many |
Type of good/services offered | Homogeneous | Differentiated |
Does firm have pricing control over their own prices? | No – Price Takers | Yes – some pricing power |
Is marketing/branding important? | No | Yes – Key non-price competition |
Are entry barriers zero, low or high? | Zero entry Barrier | Low entry Barrier |
Does this market structure lead to allocated efficiency in the long run? | Yes, Price = MC | Not Quite (P>MC) |
Does this market structure lead to productive efficiency in the long run? | Yes | No |
Situation | Unrealistic | Realistic |
Demand curve slope | Horizontal, perfectly elastic | Downward sloping, relatively elastic |
A relation between Average Revenue (AR) and Marginal Revenue (MR) | Average Revenue = Marginal Revenue | Average Revenue > Marginal Revenue. |
Conclusion
After reading the all above points, it is quite clear that perfect competition vs monopolistic competition is different in many aspects, the major difference can be understood by the fact monopolistic competition has features of both monopoly and perfect competition.
The principal difference between these two is that in the case of perfect competition the firms are price takers, whereas in monopolistic competition the firms are price makers. Perfect competition is not realistic, it is a hypothetical situation, on the other hand, monopolistic competition is a practical scenario.
Recommended Articles
This has been a guide to the top difference between Perfect Competition vs Monopolistic Competition. Here we also discuss the perfect Competition vs Monopolistic Competition key differences with infographics, and comparison table. You may also have a look at the following articles to learn more
- Revenue vs Earnings
- Investment vs savings
- Financial Accounting vs Management Accounting
- Revenue vs Sales