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 whereas a monopolistic competition is dominated by a single seller and the competition is zero, barriers to entry are also low, products that are sold can have substitutes, and non-price competition is also present.
Perfect Competition is wherein many small firms manufactures and supplies the same goods (or perfect substitute) to the end-user. Small firms mean each firm is too small to influence the market price of the product.
Monopolistic Competition is whereby there are a handful of sellers offer a particular product leading to minimal competition, however, variants and quality of products offered by each seller are slightly different.
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 the Monopolistic competition each firm will have slightly different product from each 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 from each other in the monopolistic market, pricing power exists for a very short period until new players enter the market to exploit the pricing power.
- 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 a number of units sold. Therefore, average revenue will be equal to the total revenue divided by the number of units sold. Marginal Revenue is defined as the change in the total revenue by selling an additional unit. In perfect competition, since all the units sold at an equal price, Average Revenue equals Marginal Revenue.
- In Monopolistic Competition, any firm can have pricing power for a 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 and hence the Average revenue will decrease with the increase in the quantity sold. Also, as we all know that 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 every time the firm will have to decrease the price of the product to sell an additional product. This is a reason why Marginal Revenue is diverging wider and lower compared to the average revenue in the Monopolistic Market.
|Basis||Perfect Competition||Monopolistic Competition|
|Number of Sellers||Many Firms||Many Firms|
|Barriers to Entry||Very Low||Low|
|Product Differentiation||Homogenous||Substitutes but Differentiated|
|Non-price Competition||None||Advertising and Product Differentiation|
To understand these competitions better, let’s discuss an example. You might have seen different brands of running shoes in the market. What differentiates it with 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 about the perfect and monopolistic competition, can’t we now easily differentiate between the two!!
As stated earlier, this particular topic is one of the very prominent topics covered extensively in microeconomicsMicroeconomicsMicroeconomics is a study in economics that involves everyday life, including what we see and experience. It studies individual behavioural patterns, households and corporates and their policies. It deals with supply and demand behaviours in different markets, consumer behaviour, spending patterns, wage-price behaviour, corporate policies. and hence it helps managers and business leaders to analyze and understand the prevailing situation in the market to take vital decisions.
There is no end to any analysis because the differences between the analysis might vary from one analyst to another depending upon their approach and objective. The strategy and goal of the management might depend upon the time horizon, for example, short term and long term. Thinking on the same line, hope this article succeeded in making things clear about perfect competition and monopolistic competition.
This has been a guide to Perfect vs Monopolistic competition. Here we discuss the top difference between monopolistic and perfect competition along with infographics and comparison table. You may also have a look at the following articles –