Which of the following is different about perfect competition and monopolistic competition?

The term market can be described as any place where buyers and sellers meet, directly or through dealers, to conclude transactions. There are three types of market structure, i.e. perfect competition, monopoly and imperfect competition. Further imperfect competition can be of two types: Monopolistic competition and oligopoly. In perfect competition, the product sold by different firms is identical, but in monopolistic competition, the firms sold near substitute products.

The equilibrium position of these market are reached in different circumstances and are based on revenues earned and cost incurred. In the article provided to you, we’ve simplified the differences between perfect competition and monopolistic competition.

Content: Perfect Competition Vs Monopolistic Competition

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion

Comparison Chart

Basis for Comparison	Perfect Competition	Monopolistic Competition
Meaning	A market structure, where there are many sellers selling similar goods to the buyers, is perfect competition.	Monopolistic Competition is a market structure, where there are numerous sellers, selling close substitute goods to the buyers.
Product	Standardized	Differentiated
Price	Determined by demand and supply forces, for the whole industry.	Every firm offer products to customers at its own price.
Entry and Exit	No barrier	Few barriers
Demand Curve slope	Horizontal, perfectly elastic.	Downward sloping, relatively elastic.
Relation between AR and MR	AR = MR	AR > MR
Situation	Unrealistic	Realistic

Definition of Perfect Competition

The market structure in which there are numerous sellers in the market, offering similar goods that are produced using a standard method and each firm has complete information regarding the market and price, is known as a perfectly competitive market. The entry and exit to such a market are free. It is a theoretical situation of the market, where the competition is at its peak.

The firms are price takers in this market structure, and so, they do not have their own pricing policy. The individual buyers and sellers have no control over the prices. Therefore, the sellers have to accept the price ascertained by the demand and supply forces of the market and sell the product, as much as they can at the price prevailing in the market. As the product offered for sale is identical in all respects, no firm can increase the price than that of prevailing in the market, because if a firm increases its price, then it will lose all the demand, to the competitors.

Definition of Monopolistic Competition

Monopolistic Competition refers to a type of market structure, where the number of sellers selling similar but not exactly identical products, is large. The product or service offered for sale in a monopolistic competition are close substitutes for one another. Such a market contains the features of both monopoly and perfect competition and is found in the real world situation. The salient features of a monopolistic competition are given below:

• It is a non-price competition. The firms are price makers, and so every firm has its own pricing policy, and thus the sellers are free to make decisions regarding the price and output, on the basis of the product.
• The entry and exit, into and out of the industry are easy because of fewer barriers.
• Product differentiation exists in a monopolistic competition, where the products are distinguished from each other on the basis of brands.
• Highly elastic demand curve.

The basic differences between perfect competition and monopolistic competition are indicated in the following points:

1. A market structure, where there are many sellers selling similar goods to the buyers, is perfect competition. A market structure, where there are numerous sellers, selling close substitute goods to the buyers, is monopolistic competition.
2. In perfect competition, the product offered is standardised whereas in monopolistic competition product differentiation is there.
3. In perfect competition, the demand and supply forces determine the price for the whole industry and every firm sells its product at that price. In monopolistic competition, every firm offers products at its own price.
4. Entry and Exit are comparatively easy in perfect competition than in monopolistic competition.
5. The slope of the demand curve is horizontal, which shows perfectly elastic demand. On the other hand, in monopolistic competition, the demand curve is downward sloping which represents the relatively elastic demand.
6. Average revenue (AR) and marginal revenue (MR) curve coincide with each other in perfect competition. Conversely, in monopolistic competition, average revenue is greater than the marginal revenue, i.e. to increase sales the firm has to lower down its price.
7. Perfect competition is an imaginary situation which does not exist in reality. Unlike, monopolistic competition, that exists practically.

Conclusion

After reviewing the above points, it is quite clear that perfect competition and monopolistic competition are different, where 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.

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.

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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.

MonopolisticMonopolistic 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.read more 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.

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Key Differences Between Perfect and Monopolistic Competition

• In 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.read more, 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 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.read more.
• In perfect competition, marginal 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. read more 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 revenueRevenue 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.read more will decrease with the quantity sold. Also, as we all know, the demand 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.read more 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.

Comparative Table

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
Price Power	None	Some

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!

Conclusion

As stated earlier, this particular topic is one of the very prominent topics covered extensively in microeconomicsMicroeconomics is a ‘bottom-up’ approach where patterns from everyday life are pieced together to correlate demand and supply.read more. 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.

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