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Monopolistic Market v/s Perfect Competition

Know what is the difference between monopolistic market and perfect competition.

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Monopolistic Market v/s Perfect Competition
 John Millar   Published On Aug 10, 2020 | Updated on Dec 07, 2023  Writing Service

Perfect Competition

  • Entry and departure are open to such a market.
  • The competition is at its highest theoretical condition on the market.
  • The companies have no power of rates, and they have no position on pricing. Price is not determined by the buyer or seller. A seller must therefore consider price dictated by supply and demand forces on the market.
  • Across all ways the commodity that all vendors give is similar such that no company can price up, and if a company tries to priced up, the market loses all demand.

Monopolistic Competition

  • Monopoly competition has both a balanced equilibrium and monopoly features of market systems. In real life, this form of market structure is found.
  • Companies market goods with some qualitative variations, quantity, etc., so that companies have price controls and pricing policy of the existing companies.
  • Admission and exit to the industry is simple due to less barriers.
  • Differentiation of products is one aspect of a monopoly market in which goods are distinguished by price or name.
  • It has a very elastic demand curve, which is one of the distinct criteria of monopolistic competition.

A few examples of monopolistic competition include:

  • Nightclubs and bars
  • Cafeteria
  • Meat markets
  • Drug goods
  • Stations of gas
  • Holiday Hotels

Perfect Competition Examples

  • Agriculture: Goods are very close on this market. Carrots, potatoes and grain are common, developed by many farmers. There was a mistake.
  • Traders swap currencies on the foreign exchange market. There was an mistake.
  • Shopping online: the internet might not be used as a separate market.

Some of the main differences between perfect competition and monopolistic competition are as follows:

  1. Nature of Firms: The market consists of a large number of firms under perfect competition. Every company in the industry has a very small share of the overall production. The businesses must recognize the industry 's quality. At the other hand, the number of firms is reduced under monopoly competition.
  2. Price and production nature: The optimal price of competition is comparable to marginal costs and marginal profits, while it is not equivalent with imperfect competition. Although marginal costs and marginal profits are equal under monopolistic competition, price is still not even.
  3. Benefit nature: Also in the short time under monopolies would businesses earn supernormal income. Nevertheless, super-normal income will vanish in the long term. That is because price is equal to the average production cost over the long term. The case is significantly different in the event of optimal competition.
  4. Material nature: Companies produce homogenous products under perfect competition. There is a constant cross-elasticity of demand between the products. All businesses manufacture differentiated goods in the face of imperfect competition and the cross-elasticity of demand is very low.
  5. Costs for sale: The disparity in terms of production prices is the monopoly and the full rivalry. Homogeneous goods are made and marketed at a fixed price under full competition. No sales costs are therefore needed. On the other hand, both companies manufacture differentiated goods under monopolistic competition, so each company has to pay huge sales costs.
  6. Request pitch Curves: The company's demand curve is collapsing under monopolies. The explanation for this is, if a business wants to increase its profit, is to reduce the price (Figure below). The condition is not as pleasant as that. Without every the price , the company can sell any quantity of its production without lowering the curve (figure below).
  1. AR- MR relationship: The average income and marginal income of the competition are identical, so that both curves agree with each other. Average profits in monopoly competition surpass median income, because the business must reduce prices to raise revenues. This means that median income is less than average, i.e. AR > MR.
  2. More Monopoly Trade prices: The price in monopolistic competition is higher than the price of complete competition, since a perfect competition business increases its production to the point that the median cost is smaller, i.e., optimum efficiency is reached in perfect competition.

Monopolistic Competition vs. Perfect Competition in the long run

While a business faces a downward demand trend in Monopolistic Competition, its short-term profit maximization strategy is the same as an organization in perfect competition (PC).

Again, where MR = MC is being made. The disparity is P > MR, relative to PCs with the curve of a horizontal demand P = MR.

The short-run graph on the left will also appear familiar.

Again, where MR = MC is made. This is P > MR, while PCs with a horizontal request curve P = MR. The discrepancy here.

The short run graph on the left will also look familiar.

 Competition graph

Monopolistic competition in the long run

So what's long-term happening? (It is relevant for the CFA examiner to know this for potential questions of multiple choices).

Again as barriers to entry are low (such as PC), if economic profits are favorable, new companies can enter the market. This will enhance product diversity on the market, reduce demand for each company, cut income, and push the ATC price down.

And what are the core distinctions between monopolies and true competition?

  • Price = MC is a corporation that has the capacity to set the price (so P > MC) in a monopolistic competition.
  • This implies that for each product, the MR = MC production level is actually less effective (Q < productive quantity).
  • Finally, as businesses are competitive with product differentiation, product diversity and product developments tend to be increased

Summary of Perfect Competition vs.  Monopolistic Competition

  • Good competitions and monopoly competitions are the competition scenarios for a particular geographical region.
  • A market structure in which many sellers sell similar goods and services and many buyers buy related products and services is characterized as perfect competition.
  • A monopoly is characterized by multiple retailers who offer goods and services to buyers. Yet a dominant retailer controls the market in terms of costs and product quality.
  • Certain discrepancies between perfect competition and monopolies include entry and exit barriers, market slope curve, average revenues and marginal revenues, product standardization, price determination, etc.

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