September 12, 2019

How Does Monopolistic Competition Differ from Perfect Competition?

Monopolistic Competition Differ

If you are a management student or a professional in the business field, you must have a clear idea about the different forms of market structure. Monopolistic competition and perfect competition are two forms of market structure. This blog will help you understand both of these structures and how they differ from each other.

What is Monopolistic Competition?

Monopolistic competition can be regarded as a kind of imperfect market structure. It describes a market condition where many firms sell varied products .that are not identical. In this market structure, no seller can have any definite influence on the pricing policies of other sellers. Hence, monopolistic competition refers to competition among many sellers who are producing products that are close but not absolute or perfect substitutes for each other.

Monopolistic Competition Examples in Real Life

Some examples of monopolistic competition are as follows:

  • Coffee shops
  • Hotels
  • Dry-cleaners
  • Car-washes
  • Pharmacies
  • Grocery stores

Monopolistic Competition Advantages and Disadvantages 

The pros and cons of monopolistic competition are as follows:

Advantages

  • There is no key barrier to entry, which makes the markets comparatively contestable
  • The efficiency of a monopolistic competitive market is more than a monopoly market but less as compared to a perfectly competitive market.
  • In the monopolistic competitive market, various organisations sell differentiated products. They are likely to promote it via various communication channels and thus, the customers become more aware of the different products and their features. This helps the customers make more informed decisions as they can compare the features of different products.

Disadvantages

  • Due to the differentiated products, companies can charge more than what is the fair price for having additional features in their products.
  • In this form of market structure, companies spend a lot of money on advertising which increases their expenses. This, in turn, adds additional cost to the product.
  • The companies in the monopolistic competitive market add irrelevant features to differentiate their product from the others in the market. Thus, they do not focus on improving the basic product itself. The consumer cannot benefit the way they are supposed to even after paying extra for the added features.

Monopolistic Competition Demand Curve 

The monopolistic competition demand curve has a downward slope. It means, with a decrease in the price, the desired quantity of a good will increase. Find below how the demand curve of a monopolistic competitive market looks like:

Monopolistic Competition Demand Curve

Monopolistic Market 

Not to be confused with monopolistic competition, there is another market structure, which is called monopoly market.  In the monopoly market, a single company sells a product that has no close substitutes. Here, the monopolist controls the whole supply of the product. The firm in a monopolist market is an industry itself.

What is the Perfect Competition?

Perfect competition in microeconomics can be defined as the market which involves a large number of sellers and buyers.  The huge number of buyers and sellers makes sure that supply and demand stay constant in the perfect competition market. Every business sells identical products at a single price. In this market, the consumers have perfect knowledge of the product and its price in the market.

Perfect Competition Characteristics 

The characteristics of perfect competition are as follows:

  • There are a  huge number of buyers and sellers
  • There is no artificial  restriction, i.e., sellers are at full liberty to sell
  • The firms sell identical products that are manufactured in a standardised manner
  • Both buyers and sellers have full knowledge of the market conditions; for example, traders know clearly about the prices at which goods are being bought and sold.
  • Firms can freely enter or exit a perfectly competitive market.

Perfect Competition Market Examples 

There are hardly any real-life industries that fulfill all the criteria of being a ‘perfect competition market’. However, some examples of perfect competition market are:
There are hardly any real-life industries that fulfill all the criteria of being a ‘perfect competition market’. However, some examples of perfect competition market are:

  • Agricultural markets
  • Foreign exchange markets
  • Industries related to the internet and online businesses

Perfect Competition Graph 

The perfectly competitive market graph is defined below,

perfectly competitive market graph

Perfect Competition Demand Curve 

The demand curve of a perfectly competitive market has a horizontal sloping.  It portrays, with an increase in the price of an ordinary product, the desired quantity of the product decreases.  The price is decided by the intersection of market supply and market demand. The curve looks like this:

Competition Demand Curve

S= Market Supply; D= Market Demand

Advantages of Perfect Competition 

  • Chances of consumer exploitation are quite low in perfect competition. It is because the sellers in this market have no monopoly pricing. Thus, they do not have any influence over the product price or they cannot charge consumers higher than the normal price.
  • The perfectly competitive market is considered to be consumer-oriented. The sellers cannot upset the consumers. If they do, the buyer will shift to another seller instantly.
  • In the perfect competition market, there is very little to no advertisement cost as the products are homogeneous (a product that can be easily substituted by similar goods from other suppliers, because it has fundamentally the same quality and physical characteristics as the others). It is also not necessary to spend much on advertisement because sales will happen automatically if the companies determine the price as less than the competition.

Disadvantages of Perfect Competition 

  • In this form of market structure, sellers don’t get any motivation to bring innovations or include extra features in the products. This is because sellers cannot be charged extra for those additional features as buyers may move to other sellers.
  • The location plays a huge role in generating sales. Companies located in prime locations are likely to get more sales than those which are not.
  • There are very fewer barriers to enter a perfectly competitive market as any company can enter this market to sell products.  

Key Differences between Monopolistic Competition and Perfect Competition in Table Format

Difference between Monopolistic Market and Perfect Competition

Conclusion

From the information provided above, you can understand that there are many distinct differences between the perfect competition and monopolistic competition. The main difference between the two, most probably, is that in the monopolistic competition, the organisations can decide the price and modify it as well, but businesses in perfectly competitive market cannot. Now, you can clearly distinguish between monopolistic competition and perfect competition. Thus, you will be able to write better assignments or create more effective strategies for both these market structures.

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Bella Phillips

Bella Phillips is an essay writer at Myassignmenthelp.co.uk who is associated with the company for the past six years. She has finished her master's degree from the University of South West England and has served as a guest lecturer at several colleges.

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