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Perfect and Monopolistic Competition

There are four various market structures that differ in their attributes, demand curves, and the basis on which their firms compete. These structures include perfect competition, monopolistic competition, monopoly, and oligopoly. The purpose of this paper is to discuss the perfect and monopolistic competition and their differences. Moreover, the list of their attributes and the description of the demand curves will be provided, and the examples of firms of each structure will be discussed.

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Perfect Competition

Perfect competition is a particular hypothetical market structure with a number of different sellers who offer similar goods, which are manufactured or produced using a standard method. Each company has all the needed information about the price, and this is known as a perfectly competitive market (Farnham, 2014). The attributes of perfect competition include a significant number of relatively small sellers and buyers, standardized products, a rather easy way of entering and exiting the market, impossible non-price competition, and availability of complete information to all participants.

The demand curve facing a firm in a perfect competition market is a horizontal line that is equal to the entire market’s equilibrium price and indicates that the demand for the good is completely elastic (Farnham, 2014). In other words, if any individual company charges a price that is slightly higher than that of the market, it will lose its clients and will not be able to sell any products. A firm in perfect competition is a price taker since the market states the price equal for all its companies (Farnham, 2014). Low cost is the basis on which such firms compete (Farnham, 2014). They are able to maximize their profit if the price taker’s price is equal to marginal cost.

The example of a firm competing in a market of perfect competition is DuPont – an American agricultural company. Products are rather similar in this market; various vegetables and grains are all generic, and there are many farmers who produce them. It is rather easy to buy some land and farm these products, and the price for selling them is fixed. Moreover, exiting this market is easy, too, so there are many signs of this market being of perfect competition.

Monopolistic Competition

Monopolistic competition is a special type of imperfect but real and practical market structure with several different sellers who offer similar but not entirely identical products. These products or services that are sold by companies have specific differences but are each other’s substitutes (Farnham, 2014). A market is a special place where sellers and buyers meet for transactions; this may happen through a dealer or directly. The attributes of monopolistic competition include a great number of small companies that act independently, differentiated product, relatively easy way of entering and exiting the market, and the necessity and importance of non-price competition (Farnham, 2014). A highly elastic demand curve that is rather downward-sloping is also one of the parameters that differentiate the monopolistic competition (Farnham, 2014). In other words, the monopolistic competitor may get more customers by lowering the price or raise the price without losing all clients.

A firm in a monopolistic competition competes on the basis of characteristics such as product differentiation. Since monopolistic companies produce services and products that vary slightly, in order to increase their market share, they try to attract and reach out to a larger consumer base and use advertisements to promote their goods (Farnham, 2014). These firms produce the profit-maximizing level of output if the marginal revenue equals marginal cost (Farnham, 2014). Monopolistic companies may be considered price makers since they have some pricing power.

The example of a firm competing in a market of monopolistic competition is Supercuts, which is a salon-industry leader in hair care services. Hairdressing is the sphere of services that belongs to monopolistic competition. There are many small and major firms that offer the same but slightly differentiated service. The competition is equally intense, and the prices are almost equal but may vary depending on the firm’s status.

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Reference

Farnham, P. G. (2014). Economics for managers. Pearson Education.

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StudyCorgi. (2022, April 4). Perfect and Monopolistic Competition. Retrieved from https://studycorgi.com/perfect-and-monopolistic-competition/

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