Monopoly vs Monopolistic Competition

Differences Between Monopoly vs Monopolistic Competition

A Monopoly market is characterized by a single producer and seller of a product with no substitutes. This indicates that the monopolist faces a downward-sloping demand curve and can choose the price at which its product sells. There are high barriers to entry for a new firm in a monopoly. Monopolistic competition differs from perfect competition in that products are not identical. Each firm differentiates its products from those of other firms through some combination of differences in product quality, product features, and marketing. Firms in the monopolistic competition face downward-sloping demand curves but the demand is not perfectly elastic. A monopoly at the other extreme is characterized by only one firm producing the product. In between are monopolistic competition (multiple firms with differentiated products) and oligopoly (few firms competing in various ways).

Let us study much more about Monopoly vs Monopolistic in detail:

Basically, there exist 4 different market structures in any economy or country. Monopoly vs Monopolistic competition can be differentiated in terms of the number of firms and their relative sizes, the elasticity of demand curves that they face, ways that they compete with other firms for sales, and ease/difficulty with which firms can either enter/exit the market. Perfect competition, at one end of the spectrum, consists of many firms that produce identical products and hence force all firms to sell at the same market price.

Monopoly firms’ source of power comes from elements such as copyrights or patents. Control over a resource needed specifically to make the product could be another source of power for a monopoly firm. More often than not, monopoly power is supported by the government. Monopolists are price searchers as they have imperfect information regarding market demand. They must experiment with different prices to find the one that maximizes profit.

Figure 1 illustrates the revenues and cost structure for a monopolist. Note that production will expand till Marginal Revenue (MR) = Marginal costs (MC) at optimal output Q*. The price at which the product will sell is in a demand curve which is P*. In perfect competition, the profit-maximizing output is when MR = MC which is the same for the monopolist. To ensure a profit, the demand curve must lie above the firm’s Average Total Cost (ATC) at the optimal quantity so that price > ATC. Monopoly profit is ensured when the demand curve lies above the firm’s Average Total Cost (ATC) at the optimal quantity which is characterized by price P* > ATC.

Figure 1 – Monopoly short-run costs and revenues[1]

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Further Figure 2 illustrates the concept of deadweight loss and difference in allocative efficiency in perfect competition and a monopoly. As depicted in the figure, S, the industry supply curve, indicates the summation of all supply curves of the firms competing in the market. The quantity Q_PC and equilibrium price P_PC in a perfect competition lie at the intersection of the industry supply curve and the market demand curve, D. Each firm is smaller in comparison to the overall industry, and hence there is no gain to be achieved by attempting to increase the price by decreasing output. A monopolist on the other hand facing the same demand and marginal cost curve, will produce Q_MON and ensure a maximum profit by charging a price of P_MON. A deadweight loss is created as monopolists produce a quantity that does not ensure the maximization of the sum of consumer surplus and producer surplus.

Figure 2 – Perfect Competition vs Monopoly[2]

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In perfect competition, the products by the firms are perfectly identical. The market of toothpaste is an excellent example of firms in monopolistic competition. Firms vie for customers by differentiating their products through features and marketing such as claims of fresher breath or whiter teeth or more attractive teeth or prevention of decay. If the price of your favorite product increases one is not immediately likely to switch to another brand as would have happened in perfect competition. Some customers would switch in response to a 10% increase in price and some would not.

Figure 3(a) illustrates the short-run price/output characteristics of monopolistic competition for a single firm. Firms maximize profits by producing where MR = MC. Here the firm earns positive economic profits because the price, P*, exceeds the Average Total Cost, ATC*. Due to low barriers to entry, companies will enter the market in pursuit of these economic profits. Figure 3(b) illustrates when new firms enter the market and it shifts the demand curve faced by each individual firm down to the point where Price P* equals Average Total Cost ATC* such that economic profit is zero. At this point, there is no longer an incentive for new firms to enter the market and a long-run equilibrium is established.

Figure 3 – Short and Long-run output in Monopolistic competition[3]

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Figure 4 illustrates the differences between long-run equilibrium in monopolistic and perfect competition. In monopolistic competition, the price is greater than marginal cost i.e. producers can realize a markup and the average total cost is not at a minimum for the quantity produced suggesting there is an excess capacity or an inefficient scale of production and the price is slightly higher than the perfect competition. The point to be noted here is that perfect competition is characterized by no product differentiation.

Figure 4 – Monopolistic competition vs Perfect Competition[4]

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Monopoly vs Monopolistic Competition (Infographics)

Below is the top 6 difference between Monopoly vs Monopolistic Competition

Key differences between Monopoly vs Monopolistic Competition

Both Monopoly vs Monopolistic Competition are popular choices in the market; let us discuss some of the major Differences Between Monopoly vs Monopolistic Competition:

• In a monopoly, there is only one single producer which decides the quantity and price of the product. While in monopolistic competition there are a large number of independent sellers and each firm has a relatively small market share hence no individual firm has any significant power over price. Firms in monopolistic competition pay attention to the average market price and not the price of individual competitors. There is no scope for collusion (price-fixing) in the industry.
• There is a single producer in a monopoly hence they do not have any incentive in producing differentiated products. In monopolistic competition, each producer has a product that is slightly different from its competitors (at least in the minds of consumers). The competing products are close substitutes for one another.
• The nature of competition in a monopoly is advertising. Advertising is used to target various customers. In monopolistic competition, firms have differentiated products and compete for customers on price, quality, and marketing. Quality is a significant product differentiating characteristic. Price and output can be set by firms because they face downward-sloping demand curves but there usually is a strong correlation between quality and price that the firms can charge. Marketing is a must to inform the market about a product’s differentiating characteristics.
• Firms trying to enter in monopoly face significant barriers to entry. Firms in monopolistic competition face low barriers to entry so that firms are free to enter and exit the market. If firms in the industry are earning economic profits new firms can be expected to enter the industry.

Head To Head Comparison Table Between Monopoly vs Monopolistic Competition

Below are the top 6 differences between Monopoly vs Monopolistic Competition

Conclusion

In conclusion, the primary difference between monopoly vs monopolistic competition is the number of firms. Monopoly is characterized by a single firm more often than not by the support of the government where it can discriminate on pricing to maximize profits and ensuring customers not getting value for their money. In monopolistic competition, there are multiple firms vying for customers by differentiating on quality, features, and marketing. Customers have the choice to choose which product they want to use and can easily switch between products if they want to.

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