Economists define the term market structure to classify & differentiate different industries. This differentiation is based on supply, demand, and competition for goods & services in a specific industry. The nature and characteristics of the market structure influence the operations and outcomes of every business in a specific market or industry.
Four primary categories of market structuring are observed: perfect competition, monopolistic competition, oligopoly, and monopoly. In this article, we will conduct a competitive analysis of perfect and monopolistic competition. But, to do that, we must understand the ideas behind economic competition minutely.
A Bit About Economic Competition
Economic competition is where different businesses contend against one another to survive and sustain. A competitive firm has what it takes to etch out a profitable position and establish its presence in the market. Businesses compete not only to sell their goods & services to the public but also for inputs and resources. And it is this competition and contention that shapes the structure of a particular industry or market.
Firms that dominate a market entirely exert a monopoly on an industry. Such market structures have zero economic competition.
Market structures, where a few major firms exert near-complete control, are oligopolies. Oligopolistic markets have few market participants, which influence supply and prices.
Perfect markets are ideal market conditions that exhibit perfect competition. Here, the quantity of supply equates to the quantity of demand at a certain price. Real markets are never perfect.
Monopolistic competition is a form of imperfect economic competition where there are numerous producers and consumers. No one has complete control over prices, product differentiation is prevalent, and there’s little challenge to market entry. Monopolistic competition models are closest to how markets operate in real life.
Several factors influence competition and, thereby, the characteristics of a market’s structure. Some of the most prominent factors include
- The major players in the market,
- The level of competition,
- The number of buyers and sellers,
- Market trends,
- Production costs,
- Product differentiation,
- Industry turnover,
- Market regulations,
- Technological innovation
Economists base their definitions and descriptions of different market structures on these factors. Let’s find out how these factors behave in the cases of perfect AND monopolistic competition.
What is a Monopolistic Market? What is Monopolistic Competition?
Businesses in monopolistic markets price their products on two key factors
- Production Costs
- Competitor Prices
Such behaviour has been observed in markets all around the world. But, understanding such behaviour necessitates analysing business strategies using well-defined economic models. That is where the monopolistic competition model comes in, which acts as a system for analysing the effectiveness and impact of a business’s strategy.
The monopolistic market model in economics makes certain assumptions about business behaviour.
- There is a fixed cost and a constant marginal cost of production.
- Firms produce differentiated products and provide differentiated services.
- There are numerous firms in the market.
- The quantity of products produced depends upon factors such as industry output, price sensitivity to demand, number of market participants, etc.
- As there’s free entry and exit, inter-firm profits are zero in the long run.
- A firm can make only a normal profit in the long run.
- There’s little to no direct rivalry between firms.
- Producers exert a certain level of control over prices.
- Innovation, technology, and variation are essential for thriving in a competition.
Researches and assumptions show these assumptions to be accurate in defining monopolistic markets. The long-running behaviour of monopolistic competition overlaps closely with markets having perfect competition.
The monopolistic competition market structure allows companies to make profits in the short term but not much in the long run. Short-term profits attract newcomers, increase competition, and lowers prices (the freedom of entry). This, in turn, lowers profits and causes losses in the long run. The freedom of exit causes loss-making companies to get out of the competition, thereby increasing prices and profits.
Overall, product quality, prices, and marketing influence the level of competition in a monopolistic competitive market.
A monopoly market structure exhibits imperfect competition. A single firm or multiple firms exert complete control over market prices. Businesses with a monopoly make market entry and exit difficult.
A single seller generally dominates a monopoly. Buyers, thus, have no choice when it comes to buying goods or availing services. Complete monopolies are rare, however. This is because, with the right amount of money, resources, and know-how, there are simply no absolute barriers to market entry. Governments may have the power to establish or disrupt monopolies with laws & regulations.
Monopolistic markets are inefficient and prone to corrupt practices. When a single firm exerts absolute control, it can charge exorbitant prices, produce low-quality products without fear of repercussions, and prevent newcomers from entering the market.
What are Some Real-life Examples of Monopolistic Markets?
It is expected for monopolies to exist in a capitalist economy. However, government-enforced laws and regulations prevent the dominance of a single business in a sector. Most monopolistic companies worldwide are government-backed or operate in extremely intricate & highly advanced sectors.
Certain real-life examples of monopolies are
- Railway firms
- Power generation, transmission, and distribution firms
- Luxottica, the world’s largest eyewear brand
- Microsoft, Google, and Facebook – three of the world’s biggest technology firms
There are different ways through which a business can become a monopoly.
- Natural Monopoly A situation where one company should make & sell a product due to its capital, workforce, know-how, technological prowess, etc.
- Geographical Monopoly Zero feasibility of any competition in a specific region
- Technological Monopoly A company has access, know-how, and/or rights to the technology critical to operating in a sector.
- Government Monopoly The government exerts control over a sector or industry.
Examples OF Monopolistic Competition
Examples of monopolistically competitive markets are the electronics industry, media & entertainment industry, food & beverages industry, the fashion, apparel, & sportswear industry, etc.
What is Perfect Competition?
A market structure with perfect competition is an ideal scenario. The key features of a perfectly competitive market structure are as follows.
- Numerous small firms operate in the market.
- There are no barriers to entry and exit.
- Products from different businesses are identical.
- No one firm can influence the overall market price.
All firms have complete information about the products & prices of other firms.
- The market itself is large and completely homogeneous.
- The supply and demand mechanics of the market sets prices.
- Pure or perfect market competition is an ideal scenario depicted by neoclassical economics. Every business in a perfect market commands a small share, and consumers have various options. As products and services are identical, price differences play a major role in consumers choosing one business. Companies make enough to stay afloat; lower-priced products will overtake them if they look for excess.
- A supply and demand equilibrium exists that exerts definitive control over market prices. Such equilibriums are not possible under real conditions, and thus, a perfectly competitive market is a theoretical construct.
What are the Examples of Perfect Competition in Real Life?
Perfect markets do not exist in real life. Monopolistic competition and oligopolistic competition, where corporations and SMEs compete with one another and none exert complete control, are the two most common market structures in real life.
So, how does a monopoly compare to a perfectly competitive market?
What's the Difference between Monopolistic Market vs Perfect Competition?
- In perfect competition, all firms sell a similar product. Each is a perfect substitute for the other.
- For monopolies, the products and services of the dominant firm are the standard. It generally differs vastly compared to any potential competitors.
- In a monopoly, only one major seller exists in the entire market. The dominant seller exerts complete control over market prices because there is no effective competition.
- When it comes to perfect competition, several firms operate in the market.
- In perfect competition, product prices are near-about equal to the marginal cost of production. No singular firm controls market price or can make a high-profit level.
- Perfect competition and monopoly exist at opposite ends of the spectrum.
- There are high barriers to entry and exit in a monopoly. On the other hand, a firm can enter or exit the market at any time in a perfectly competitive market.
- The prices set by the monopoly business depend upon its will to maximise its returns and make a bigger profit.
In the case of perfect competition, the equilibrium between the supply and demand function controls the prices in the market.
Key Differences Between Perfect and Monopolistic Competition
- Product differentiation is non-existent in perfect competition. In the case of monopolistic competition, every firm has to offer something different.
- Due to product differentiations, firms need to advertise how their products are different/better to the audience.
- Marginal revenues equate to average revenues in perfect competition.
- Monopolistically competitive firms can exert pricing control if no other firm offers better products at lower prices.
And, with that, we wrap up this write-up. I hope it was a good read for one and all.
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FAQs On Perfect and Monopolistic Competition
Q: What are the characteristics of a monopolistic market?
Ans: A monopolistic market has a single major player who has complete pricing power in the market. There are no major competitors, and the market dominator controls supply & pricing and makes market entry tough.
Q: What are the characteristics of perfect competition?
Ans: No single company has a market share in a perfectly competitive market structure. All firm offerings are homogenised, and there's complete freedom of market entry & exit. And there are several buyers and sellers in the sector.
Q: What is the impact of a monopolistic market on prices?
Ans: As monopolies enjoy complete pricing power, they can control supply, manipulate market prices at will, and make excessive profits. Costs rise, output lowers, and innovation falters.
Q: How do prices in perfect competition compare to monopolistic markets?
Ans: The equilibrium between supply and demand controls prices in perfect competition. On the other hand, monopolies have complete control over market prices.
Q: Can monopolistic markets evolve into perfect competition?
Ans: In reality, no market is completely perfect or a monopoly.