perfect competition vs monopoly essay

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Monopolistic Market vs. Perfect Competition: An Overview

A monopolistic market and a perfectly competitive market represent two market structures that have several key distinctions in terms of market share , price control, and barriers to entry . In a monopolistic market, there is only one firm that dictates the price and supply levels of goods and services, and that firm has total market control. A perfectly competitive market is composed of many firms, where no one firm has market control.

Monopolistic and perfectly competitive markets affect supply, demand, and prices in different ways. In the real world, no market is purely monopolistic or perfectly competitive. Every real-world market combines elements of both of these market types.

Key Takeaways:

• In a monopolistic market, there is only one firm that dictates the price and supply levels of goods and services.
• A perfectly competitive market is composed of many firms, where no one firm has market control.
• In the real world, no market is purely monopolistic or perfectly competitive.
• In between a monopolistic market and perfect competition lies monopolistic competition or imperfect competition.
• In monopolistic competition, there are many producers and consumers in the marketplace, and all firms only have a degree of market control.

In a monopolistic market , firms are price makers because they control the prices of goods and services. In this type of market, prices are generally high for goods and services because firms have total control of the market. Firms have total market share, which creates difficult entry and exit points. Since barriers to entry in a monopolistic market are high, firms that manage to enter the market are still often dominated by one bigger firm.

A monopolistic market generally involves a single seller, and buyers do not have a choice concerning where to purchase their goods or services.

Purely monopolistic markets are extremely rare and perhaps even impossible in the absence of absolute barriers to entry, such as a ban on competition or sole possession of all natural resources. Sometimes, however, a government will establish a monopolistic market to ensure national interests or maintain critical infrastructure. For instance, many utilities such as power companies or water authorities may be granted a monopoly status for a certain area.

In the absence of such permission, governments often have laws and enforcement mechanisms to promote competition by preventing or breaking up monopolies. This is because a monopolistic market can often become inefficient, charge customers higher prices than would otherwise be available, and can prevent newcomers from entering the market. Thus, there are various antitrust regulations that keep monopolies at bay.

A monopoly is when there is only one seller in the market. A monopsony , on the other hand, is when there is only one buyer in a market.

In a market that experiences perfect competition , prices are dictated by supply and demand. Firms in a perfectly competitive market are all price takers because no one firm has enough market control. Unlike a monopolistic market, firms in a perfectly competitive market have a small market share. Barriers to entry are relatively low, and firms can enter and exit the market easily. Contrary to a monopolistic market, a perfectly competitive market has many buyers and sellers, and consumers can choose where they buy their goods and services.

Companies earn just enough profit to stay in business and no more. If they were to earn excess profits, other companies would enter the market and drive profits down. As mentioned earlier, perfect competition is a theoretical construct. As such, it is difficult to find real-life examples of perfect competition.

Pricing in perfect competition is based on supply and demand while pricing in monopolistic competition is set by the seller.

According to economic theory, when there is perfect competition, the prices of goods will approach their marginal cost of production , or the cost of producing one additional unit. This is because any firm that tries to sell at a higher price in an attempt to earn excess profits will be undercut by a competitor seeking to grab market share. This also promotes a sort of technological arms race in order to reduce the costs of production so that competitors can undercut one another and still earn a profit. Over time, however, as technology diffuses through to all producers, the effect is to lower consumer prices even further, as well as to erode profits for producers.

In between a monopolistic market and perfectly competitive market lies monopolistic competition . In monopolistic competition, there are many producers and consumers in the marketplace, and all firms only have a degree of market control. In contrast, whereas a monopolist in a monopolistic market has total control of the market, monopolistic competition offers very few barriers to entry. All firms are able to enter into a market if they feel the profits are attractive enough. This makes monopolistic competition similar to perfect competition.

However, in a monopolist competitive market, there is product differentiation . Products in monopolistic competition are close substitutes; the products have distinct features, such as branding or quality. This is unlike both a monopolistic market, where there are no substitutes for products, and perfect competition, where the products are identical.

In reality, all markets will display some form of imperfect competition. That is because there will always be some barriers to entry, some information asymmetries , larger and smaller competitors, and small differences in product differentiation .

What Are the Differences Between Monopolistic Markets and Perfect Competition?

In a monopolistic market, there is only one seller or producer of a good. Because there is no competition, this seller can charge any price they want subject to buyers' demand and establish barriers to entry to keep new companies out. On the other hand, perfectly competitive markets have several firms each competing with one another to sell their goods to buyers. In this case, prices are kept low through competition, and barriers to entry are low.

What Is the Difference Between a Monopoly and a Monopolistic Market?

A monopoly refers to a single producer or seller of a good or service. A monopolistic market is the scope of that monopoly. For instance, XYZ Co. may be a monopoly producer of widgets. It can control a monopolistic market over all the widgets sold in the United States whereby nobody else sells widgets.

What Are the Main Characteristics of Perfect Competition?

In a perfectly competitive market: All firms sell an identical product; all firms are  price-takers ; all firms have a relatively small market share; buyers know the nature of the product being sold and the prices charged by each firm; and the industry is characterized by freedom of entry and exit. In reality, some or all of these features are not present or are influenced in some way, leading to imperfect competition .

Monopolistic markets and perfectly competitive markets are two different types of market structures. Monopolistic markets are characterized by the domination of one firm, which can dictate price, supply, barriers to entry, and other terms. In contrast, perfectly competitive markets are composed of many firms, where no single firm has total control.

In the real world, most markets are neither monopolistic nor perfectly competitive. Rather, they exist on the spectrum between these two types.

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Monopoly vs Perfect Competition

Updated November 24, 2023

Difference Between Monopoly vs Perfect Competition

Under a Monopoly market structure, there is one product seller in lieu of various buyers; hence the seller has the full influence to set the price. Therefore, under the monopoly market structure, the seller is a price maker, not a price taker. Also, there are high barriers to entry and exit the market. As a result, not many sellers can enter the market. Under the Perfect Competition market structure, there are large numbers of buyers and sellers in the market, and each firm is taking the same price of the product from the buyers. Each firm is a price taker and not a price maker because there are low barriers to entry and exit in the market. Under perfect competition, all sellers of the product sell identical products.

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This Monopoly vs Perfect Competition article will focus on understanding the difference between Monopoly vs Perfect Competition.

A market is a platform where various buyers and sellers of a commodity meet, interact, and strike a deal at a mutually agreed price. There are different kinds and natures of markets that are explained in economics. The various factors which determine what kind of market and the nature of the market are the number of buyers and sellers in the market, the market’s Entry and exit, the power to influence the price in the market, and the intensity of competition.

There is the following number of markets that are present: –

• Perfect Competition
• Imperfect Competition

Head To Head Comparison Between Monopoly vs Perfect Competition (Infographics)

Below is the top 6 difference between Monopoly vs Perfect Competition:

Key Differences Between Monopoly vs Perfect Competition

Both Monopoly vs Perfect Competition are popular choices in the market; let us discuss some of the major differences:

• The key difference between Monopoly vs Perfect Competition is that in the short-run, under perfect competition, the seller will always earn normal profit because there will be abnormal profits due to low barriers for entry and exit. Monopoly market structure, the seller can end up earning abnormal profits in the short run as the seller is a price-maker and not a price-taker
• Under perfect competition, each seller is selling an identical product in the market, and there is no product differentiation in perfect competition. On the contrary, monopoly, since there is only one seller of the product, there is a possibility of price discrimination by the seller in the market. For example, he can sell electricity to some district at a much cheaper price to a district where he can charge the premium on the electricity supplied by the seller.
• In a perfect competition market, there is intense competition among the sellers, and the other sellers will immediately match any decrease in product price. To avoid this, the sellers form a cartel in the market and charge the same price. On the other hand, under a monopoly market structure, the seller can charge the price for the product sold by him at his will. Usually, in a market structure of monopoly, the government keeps a check on the price sold by the seller to avoid price discrimination.
• The price set by the monopoly is generally controlled or monitored by the government to protect the customers’ interest. For example, electricity is an example of a monopoly market with only one producer of the goods. On the other hand, in perfect competition, there is no such price regulation as each seller charges the same price for the product sold.

Monopoly vs Perfect Competition Comparison Table

Below is the 6 topmost comparison between Monopoly vs Perfect Competition

The market is thus a very important platform and a contact point where customers can come and buy the goods. Markets should always act in the interest of the customers as they are always the ultimate users of the good, especially in the case of a monopoly where the seller is free to charge whatever he intends to because there is no competition. In this case, the government should play a major role in levying the price ceiling and initiatives like this to act in the customer’s sole interest and make trade more realistic and justifiable.

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This has guided the top difference between Monopoly vs Perfect Competition. Here we also discuss the Monopoly vs Perfect Competition key differences with infographics and a comparison table. You may also have a look at the following articles to learn more.

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Perfect Competition vs Monopoly Essay Guide

10th February 2014

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A quick but informative guide on how to structure an essay evaluating perfect competition and monopoly. For more videos, click here

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Jim co-founded tutor2u alongside his twin brother Geoff! Jim is a well-known Business writer and presenter as well as being one of the UK's leading educational technology entrepreneurs.

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• Key Differences

Know the Differences & Comparisons

Difference Between Perfect Competition and Monopolistic Competition

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

Comparison chart.

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.

Key Differences Between Perfect Competition and Monopolistic Competition

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

• 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.
• In perfect competition, the product offered is standardised whereas in monopolistic competition product differentiation is there.
• 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.
• Entry and Exit are comparatively easy in perfect competition than in monopolistic competition.
• 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.
• 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.
• Perfect competition is an imaginary situation which does not exist in reality. Unlike, monopolistic competition, that exists practically.

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.

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Comparison: Monopoly and Perfect Competition | Economics

We often make a comparison between monopoly and perfect competition. Such a comparison is done in Fig. 7. If Fig. 7 represented the position of a firm under perfect competi­tion then the equilibrium output would be OQ (where P = MC) and the price would be OP.

If, however, the diagram were to represent a monopoly situation, the equi­librium output would be OQ 1 (where MR = MC) and the price would be OP 1 . Thus monopoly output is less than competitive output but monopoly price is higher than competitive price. This supply means that if a firm does not have any competitors to fear, then it is in a position to raise its price.

Cost considerations:

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The comparison made here rests on the assumption that the cost curves are the same in both types of markets. Such an assumption may not be correct. Because the monopolist is the only producer of the commodity, he is likely to be a very large firm that can secure economies of scale.

If he can derive the advantages of large-scale production, then his marginal and average costs would be lower than those of a perfectly competitive seller. If this is so, monopoly price will be lower and output higher than under perfect competition.

Yet the fact remains that a restriction of competition, as under monopoly, is likely to lead to higher prices and some other form of exploitation. This is why the government takes various actions to control monopolies and restrictive trade practices.

However, monopolies have potential advantages also. If by concentrating production into one firm economies of scale are secured, the benefits arising from this may be passed on to the consumers. In other words, price can be reduced when costs fall. This is possible only when a commodity is pro­duced on a very large scale in a single plant.

Moreover, in some situations it would be wasteful to have the unneces­sary duplication of a service which would accompany competition. If, for instance, the post office is privately owned, two postmen would go to the same village to deliver one letter each.

Again, the existence of monopoly power does not necessarily involve the misuse of that power. Monopolist does not always raise price as far as he can. If railways charge exorbitant fares, people may switch over to road transport.

A monopolist may refrain from raising price as far as he can because he does not want to encourage the entry of new firms into the industry. If the excess profits are very high, potential new entrants may try to find ways of overcoming whatever barriers have hitherto kept them out of the industry.

Demerits of Monopoly:

Monopoly price is likely to be higher than competitive price. This is one major argument against monopoly. A monopolist usually charges as much as the traffic will bear. So consumers are exploited and there is loss of consumer welfare.

Another drawback of monopoly, again from the consumer’s welfare point of view, is the lack of choice. The monopolist is the sole supplier of the commodity. So the consumer cannot express dissatisfaction by turning to a competitor’s product.

The third drawback of monopoly is loss of product quality. The lack of competition may lead to complacency. He may lead a quiet life without being bothered almost rivals because he has none. As a result efficiency may decline and low quality product may be supplied. People often complain about the quality of food served in railway restaurants.

Such restaurants find themselves in a monopoly position because customers have nowhere else to go unless they bring their own food. If there were two or three suppliers in the same station in competition with one another, one might expect the complaints about standards to be reduced as each of the competi­tors would try to ensure that the customers come to them again and again.

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Difference between Perfect Competition and Monopoly

The number and types of firms operating in an industry and the nature and degree of competition in the market for the goods and services is known as Market Structure. To study and analyze the nature of different forms of market and issues faced by them while buying and selling goods and services, economists have classified the market in different ways. The different forms of market structure are Perfect Competition and Imperfect Competition (Monopoly, Monopolistic Competition, and Oligopoly). 

What is Perfect Competition?

A market situation where a large number of buyers and sellers deal in a homogeneous product at a fixed price set by the market is known as Perfect Competition. Homogeneous goods are goods of similar shape, size, quality, etc. In other words, in a perfectly competitive market, the sellers sell homogeneous products at a fixed price determined by the industry and not by a single firm. In the real world, the situation of perfect competition does not exist; however, the closest example of a perfect competition market is agricultural goods sold by farmers. Goods like wheat, sugarcane, etc., are homogeneous in nature and their price is influenced by the market. 

Features of Perfect Competition Market

• Large Number of Buyers and Sellers: There are so many buyers and sellers in the market that no single buyer or seller can influence the market price. Each participant is a price taker.
• Homogeneous Products: The products offered by different sellers are identical or perfectly substitutable. Buyers have no preference for one seller’s product over another’s.
• Free Entry and Exit: Firms can freely enter or exit the market without any significant barriers. This ensures that firms can respond to changes in market conditions by adjusting their level of production.
• Perfect Information: All participants have complete and perfect information about prices, product quality, and other relevant factors. This allows them to make informed decisions.
• No Price Control: Firms cannot influence the market price; the price is determined by the forces of supply and demand. Individual firms accept the market price as given.
• Profit Maximization: Firms aim to maximize their profits by adjusting their output levels based on the marginal cost of production and the market price.
• No Externalities: There are no external costs or benefits that affect third parties outside the market. All costs and benefits are reflected in the market price.

Also Read: Market : Characteristics & Classification Perfect Competition Market: Meaning, Features and Revenue Curves Monopoly Market: Features, Revenue Curves and Causes of Emergence Distinction between the four Forms of Market(Perfect Competition, Monopoly, Monopolistic Competition and Oligopoly)

What is Monopoly?

Monopoly is a completely opposite form of market and is derived from two Greek words, Monos (meaning single) and Polus (meaning seller). A market situation where there is only one seller in the market selling a product with no close substitutes is known as Monopoly. For example, Indian Railways. In a monopoly market, there are various restrictions on the entry of new firms and exit of existing firms. Also, there are chances of Price Discrimination in a Monopoly market. 

Features of Monopoly Market

• Single Seller: There is only one firm that supplies the entire market. This firm is the sole producer of the good or service.
• No Close Substitutes: The product offered by the monopoly has no close substitutes. Consumers have no alternative products to switch to, which gives the monopolist significant market power.
• High Barriers to Entry: Significant barriers prevent new firms from entering the market. These barriers can be legal (patents, licenses), technological (high startup costs, unique technology), or resource-based (control over a key resource).
• Price Maker: The monopolist has substantial control over the price of the product. Unlike in perfect competition, the monopoly can influence the market price by adjusting the level of output.
• Profit Maximization: The monopolist maximizes profits by setting a price where marginal revenue equals marginal cost (MR = MC). This often results in higher prices and lower output compared to competitive markets.
• Price Discrimination: The monopolist may practice price discrimination, charging different prices to different consumers based on their willingness to pay. This can lead to increased profits.
• Lack of Economic Efficiency: Monopoly markets are often less efficient than competitive markets. They can lead to allocative inefficiency (where resources are not used in the most valued way) and productive inefficiency (where goods are not produced at the lowest possible cost).

Perfect Competition and Monopoly – FAQs

Perfect Competition is a market structure characterized by a large number of small firms, homogeneous products, free entry and exit, perfect information, and no control over prices by individual firms.

How are prices determined in a perfectly competitive market?

Prices are determined by the forces of supply and demand. Individual firms accept the market price as given.

What happens to profits in the long run in perfect competition?

In the long run, firms earn only normal profits (zero economic profit). Any economic profits attract new firms, increasing supply and driving prices down until only normal profits remain.

Why is perfect competition considered efficient?

Perfect competition leads to allocative and productive efficiency. Resources are allocated to their most valued uses, and goods are produced at the lowest possible cost.

What is a monopoly?

A monopoly is a market structure where a single firm is the sole producer and supplier of a product or service with no close substitutes, allowing significant control over prices.

How does a monopolist set prices?

A monopolist sets prices by choosing the output level where marginal revenue equals marginal cost (MR = MC). This typically results in higher prices and lower output than in competitive markets.

What are barriers to entry in a monopoly market?

Barriers to entry can include legal restrictions (patents, licenses), high startup costs, control over key resources, and technological advantages.

What is price discrimination in a monopoly?

Price discrimination occurs when a monopolist charges different prices to different consumers for the same product based on their willingness to pay, thereby increasing profits.

Are monopolies efficient?

Monopolies are generally less efficient than competitive markets. They can lead to allocative inefficiency (misallocation of resources) and productive inefficiency (higher production costs).

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Perfect Competition vs Monopoly: Difference and Comparison

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Buying and selling products generate revenues and fulfil the needs of people. Buyers and sellers meet and conclude the transaction, and that is termed the Market.

Three types of market structure are Perfect Competition, Monopoly, and Imperfect competition.

Perfect competition and Monopoly have different types of market structures, and they are very different from each other.

Key Takeaways In perfect competition, many small firms compete against each other, while in a monopoly, there is only one dominant firm. Perfect competition results in lower consumer prices, while monopoly allows the dominant firm to charge higher prices. The perfect competition encourages innovation and efficiency, while monopoly can lead to complacency and lack of innovation.

Perfect Competition vs Monopoly

Perfect competition is a market situation occurring when multiple companies produce homogenous products and services to a large number of well-informed consumers. Here, every company earns normal profits. In a monopoly, companies compete with each other by selling similar products and services. Here, some firms earn super-profits due to their domination in the market.

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A form of market structure where there is a large number of competition, a large number of seller and buyers who deals with similar goods and services are termed as perfect competition.

There are almost no entry barriers, and they are driven by small firms which have no such influence on the market prices of the products.

Another form of market structure where there is minimal competition and low entry and exit barriers, along with the changed quality and variants of the products offered by each seller, is termed as Monopoly or monopolistic competition .

There are a large number of buyers for specific products with a limited number of sellers for that product.

Comparison Table

What is Perfect Competition?

A perfectly competitive market structure has many buyers and sellers. The consumer can choose the goods and services of their choice. The prices are dependent on supply and demand.

The firms in perfect competition are price takers as no one has total control of the market.

The barriers to this competition are very low, and small firms enter and exit easily. Small firms have relatively small market shares.

In this, the firm will always end up earning normal profits in the short run, and there are no abnormal profits. The products are also homogeneous and identical, and there is no product differentiation.

The intense competition in this market makes the price influence every firm, and if there is an increase or decrease in the prices of the products, then the other sellers should also match the same prices.

What is Monopoly?

In a Monopoly market, there are not enough sellers, and there is a large number of buyers. In this, the firms are price makers, and thus, the prices are very high as the firms have total control over the market.

They have high and difficult entry and exit barriers.

The firms that enter these markets are dominated by the bigger firms. In this competition, the products are not standardized, and they can have substitutes.

The products are very specific, and buyers are not left with many choices to buy. There can be abnormal profits in the short run. Although they are price makers, the government keeps checking on them to avoid product discrimination.

Main Differences Between Perfect Competition and Monopoly

• There are a large number of competitors present in a perfect competition market, whereas there is less or no such competition present in a Monopoly.
• There is a large number of sellers and buyers for dealing with similar goods and services present in perfect competition, whereas, in a monopoly, there are a large number of buyers present for the product but fewer sellers.
• In perfect competition, the products are standardized, homogeneous, and identical, whereas in a monopoly, the products are not standardized, and there can also be substitutes for the products.
• The entry and exit barriers are very low in perfect competition, whereas, in monopoly, the entry and exit barriers are low and difficult.
• In perfect competition, the prices dictated are based on the demand and supply, whereas, in a monopoly, the firms have control over the markets.
• In perfect competition, the prices are normal and not high because there are many suppliers, whereas, in the case of a monopoly, the prices are high as the firm has control over the market.

• https://www.journals.uchicago.edu/doi/abs/10.1086/257878
• https://www.jstor.org/stable/2296904

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