Perfect Competition may be defined as many small firms manufactures and supplies the same goods (or perfect substitute) to the end-user while Monopolistic Competition is type of market where there are a handful of sellers offer a particular product leading to minimal competition, however, variants and quality of products offered by each seller are slightly different.
This is a derivative of our discussion above.
The equilibrium output of the monopolistically competitive firm is less than the output where total cost is at a minimum. (This is known as excess capacity theorem).
Under monopolistic-competition. equilibrium price is higher and output is lower, ceteris paribus than under perfect competition.
Under monopolistic-competition. equilibrium price is greater than marginal cost.
Monopolistically competitive firms will offer wider variety of brands styles and possibly qualities than firms in perfect competition.
Monopolistically competitive firms will engage in nonprice competition whereas perfectly competitive firm will not.
The monopolistic competition is an intermediate model between perfect competition and monopoly.
This is the case in which most companies face competitors who market substitutes similar to their products, but differentials, due to which there is no homogeneity between the products of the different suppliers. “Each company has a monopoly on the sale of a single product, but the various brands are close substitutes.”
This model has concurrent characteristics:
Differentiated products that compete in the market, constituting similar substitutes for each other.
Large number of bidders, none of which is so important that their actions produce opposite reactions to their rivals.
Demand reaction to price changes and identical cost structure for all bidding companies.