Perfect vs Monopolistic Competition Differences
In a perfect competition market, there are many competitors, barriers to entry are very low, products that are sold are homogenous and identical, absence of non-price competition. However, whereas monopolistic competition is dominated by a single seller and the competition is zero, barriers to entry are also low, sold products can have substitutes, and non-price competition is also present.
Many small firms manufacture and supply the same goods (or perfect substitutes) to the end-user in perfect competition. Small firms mean each firm is too small to influence the product’s market price.
MonopolisticMonopolisticMonopolistic refers to an economic term defining a practice where a specific product or service is provided by only one entity. Hence the entity supplying the product or service has the dominance in its price-fixing and deciding on the market output. competition is whereby a handful of sellers offer a particular product leading to minimal competition. However, each seller’s variants and quality of products are slightly different.
Table of contents
Key Differences Between Perfect and Monopolistic Competition
- In the perfect competition marketIn The Perfect Competition MarketPerfect competition is a market in which there are a large number of buyers and sellers, all of whom initiate the buying and selling mechanism. Furthermore, no restrictions apply in such markets, and there is no direct competition. It is assumed that all of the sellers sell identical or homogenous products., each firm sells a homogenous product (or perfect substitute), whereas, in monopolistic competition, each firm will have a slightly different output from the other.
- Since products are slightly different from each other in the monopolistic market, non–price competition, like advertising and promotion, exists in the monopolistic market to inform buyers about the quality of the product.
- Since the products are slightly different in the monopolistic market, pricing power exists quickly until new players enter the market to exploit the pricing powerPricing PowerPricing power refers to the power of an entity to choose the desired price for its product or service without the risk of losing its demand or customer base. Generally, it is an attribute of companies that are market leaders or monopolies..
- In perfect competition, marginal revenueMarginal RevenueThe marginal revenue formula computes the change in total revenue with more goods and units sold." The value denotes the marginal revenue gained. Marginal revenue = Change in total revenue/Change in quantity sold. is equal to average revenue. Total revenue is defined as a price per unit multiplied by units sold. Therefore, the average revenue will be similar to that divided by units sold. Marginal revenue is defined as the change in the total revenue by selling an additional unit. Average revenue equals marginal revenue in the perfect competition since all the teams are sold equally.
- In monopolistic competition, any firm can have pricing power for very little time as any signal of supernormal profit would attract other firms to enter the market. Therefore, if a firm in the monopolistic market wants to sell more of its product, that firm will have to decrease the price. Hence, the average revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions. will decrease with the quantity sold. Also, as we all know, the demand curveDemand CurveDemand Curve is a graphical representation of the relationship between the prices of goods and demand quantity and is usually inversely proportionate. That means higher the price, lower the demand. It determines the law of demand i.e. as the price increases, demand decreases keeping all other things equal. is downward sloping from left to right, so the firm will have to decrease the product’s price to sell an additional. That is why marginal revenue is diverging wider and lower than the monopolistic market’s average revenue.
|Number of Sellers
|Barriers to Entry
|Substitutes but Differentiated
|Advertising and Product Differentiation
To understand these competitions better, let us discuss an example. You might have seen different brands of running shoes in the market. What differentiates them from each other is the uniqueness of each shoe brand. The difference in the product is informed to buyers through advertisement and promotion (non-price competition), as shown in the table above. Having understood the perfect and monopolistic competition, we cannot easily differentiate between the two!
As stated earlier, this particular topic is one of the very prominent topics covered extensively in microeconomicsMicroeconomicsMicroeconomics is a ‘bottom-up’ approach where patterns from everyday life are pieced together to correlate demand and supply.. Hence, it helps managers and business leaders analyze and understand the prevailing situation in the market to make vital decisions.
There is no end to any analysis because the differences between the research might vary from one analyst to another depending upon their approach and objective. Moreover, the strategy and goal of the management might rely upon the time horizon. For example, short-term and long-term. We hope this article clarifies perfect and monopolistic competition by thinking on the same line.
This has been a guide to Perfect competition vs. Monopolistic competition. Here, we discuss the top differences with infographics and a comparison table. You may also have a look at the following articles: –