Which of the following is a difference between a monopolist and a firm in perfect competition?

Video transcript

- [Instructor] In this video, we're going to dig a little bit into the idea of what it means to be a monopoly, and so to help us appreciate that, let's think about the spectrum on which firms can be. So this is going to be my spectrum right over here. Now at the left end, we can imagine this idealized perfect competition, perfect competition, and we've talked about that in the other videos, but just as a review, this is where you have many firms. This is where they are selling an undifferentiated product or service, undifferentiated, undifferentiated product. The firms over here, well, they have no barriers to entry or exit, so no barriers to entry or exit. These firms that we've talked about in other videos, they need to be price takers. Why do they need to be price takers? Well, whatever the market price is, since no one cares which of these firms, which of these many firms they get the product from, none of those firms can really set their own price. If they were to go above the market price, well then no one will buy from them, and so they will just be price, price takers, and other things that we assume about perfect competition is that all of the actors in the market, both the buyers, the many buyers and the many sellers, they all know what the transactions are going on for. They know who's selling to whom for what amount. Now the other extreme, this is where we have the monopoly, monopoly. Here, instead of many firms selling or many firms producing, you have exactly one firm producing. Instead of an undifferentiated product, well, it's differentiated because it's the only firm. Instead of no barriers to entry or exit, here we have the exact opposite, so you could say insurmountable, insurmountable, mountable, I'll just abbreviate it, barriers, especially to enter, and instead of being a price taker, you are a price setter, price setter. You're the only player. You're the only actor who is selling anything, So you can decide what price to sell it at. Now, perfect competition as I talked about, it's a bit of a theoretical idea. It's hard to say any market that is absolutely perfect, but we can imagine markets that are on this spectrum, some closer to perfect competition, some closer to a monopoly. Things that I can imagine that are closer to perfect competition might be, let's say, agriculture or a certain type of agriculture. Let's say you are buying pistachios, and you might be, most people are indifferent as to where their pistachios come from, although some people might beg to differ that certain types of pistachios are better than others, but for the most part, that'd be closer to perfect competition. There will be just a price in the market for pistachios. If someone wants to grow pistachios, I'm not familiar with what it takes to grow pistachios, and I apologize to any offense to any pistachio growers out there, but maybe they can just get enough land, and there's very close to low barriers to entry, and they can start producing pistachios. As I mentioned, many would perceive it as undifferentiated, and there might be many firms in, say, the pistachio market. I actually don't know if that's the case, but let's just assume if that were the case it would be closer to a perfect competition. Now a monopoly, you can imagine things like things that take a lot of infrastructure in order to do that service. So I can imagine things like, over here, close to monopoly or at monopoly. You can imagine things like utilities providers, utilities, where it's hard for multiple people to run power lines to the various houses. You can imagine things like this. Telecom, telecom providers might be close, although in most geographies, you have more than one telecom providers, although in some parts of the world, you're getting pretty close to one because, once again, there's very, very, very high barriers to entry in either one of those. You gotta launch satellites and put cable under the ground and dig up roads and whatever until you get closer and closer to this notion of maybe there's one firm. If you're in a situation like telecom in a lot of the places where you have only a handful of firms, that's known as an oligopoly, but let's just think about the extreme, when you're in a monopoly situation, and so the next few videos, we're gonna dive a little bit deeper into what it means to be a monopoly, and what is the rational quantity for a profit-maximizing monopolistic firm to actually produce, and what would be their economic profit?

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.