Difference Between Perfect Competition and Monopolistic Competition

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Perfect Competition vs Monopolistic Competition

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.

Perfect Competition and Monopolistic Competition
Perfect Competition and Monopolistic Competition

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.

Perfect Competition – Meaning & Features

Perfect competition is a market structure that implies the easy entry and exit of a business; it also supposes full information for all consumers and participants.

This simple description generates “low and stable” profits, because at the moment in which higher profits begin to be obtained, new competitors immediately enter, causing a reduction in them.

As consumers also have full information, it is easy to opt for the low price, since these are very standard products or services.

Characteristics of Perfect Competition

It has the following characteristics:

  • Homogeneity of the product, that is to say that the product offered by any seller is the same as that offered by all the rest.
  • No participant in the market, be it buyer or seller, can influence the price alone, since each one individually is so small in relation to the market as a whole that their actions cannot affect it.
  • Resource mobility, which implies, for example, that workers can move from one region to another, raw materials are accessible to all on equal terms, companies can enter or leave the market, etc.
  • Market information transparency, such that consumers, companies and resource owners have perfect knowledge of the economic and technological data relevant to their activity.

Monopolistic Competition – Definition & Features

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.