Compare and contrast monopolistic competition versus perfect competition PDF

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Compare and contrast monopolistic competition versus perfect competition. Monopolistic competition describes a market structure in which firms have many competitors, but each one sells a slightly different product. Whereas in a perfect competition market there are numerous sellers, selling similar goods that are produced/manufactured using a standard method and each firm has all information regarding the market and price. In a monopolistic competition a firm is able to set the price in the market (to some extent). This means that this firm faces downwards sloping demand curves (fig c). For example, Armani is a monopoly in Armani shirts and The Kooples is a monopoly in The Kooples shirts. Each of these garment manufacturers face a downward-sloping demand curve for its products (fig c). However, because each of these high end products is at the same time a substitute for the other, this demand curve is relatively elastic and it is more elastic than in monopoly (a firm that is a sole seller that dominates the market), but less elastic than in perfect competition (fig a). In perfect competition such as the drinkable water market Evian, St Pellegrino, Badois, Perrier, etc ), if a firm raises its price, it loses all its sales to its competitors (fig a). In monopolistic competition (fig c), if a firm raises its price, it will lose more sales than the monopolist, because consumers now do have substitutes they can switch to; but it will lose fewer sales than the perfectly competitive firm because of product differentiation – the available substitutes are not perfect substitutes, As the term ‘monopolistic competition’ suggests, this market structure combines elements of both competition and monopoly. It resembles perfect competition because there are many firms in the industry and there is freedom of entry and exit (Firms in both perfect and monopolistic competition earn zero economic profit (normal profit) in the long run. Further, firms in both market models can earn economic (supernormal) profit or make losses in the short run. The profits and losses disappear in the long run because in both models there is free entry and exit of firms, which ensures entry into profitable industries and exit from unprofitable ones).

Perfect and monopolistic competition include similarities such as: they both have a large number of firms and both earn zero economic profit (normal profit) in the long run. The profits and losses disappear in the long run because in both models there is free entry and exit of firms,

which ensures entry into profitable industries and exit from unprofitable ones and both firms achieve productive and allocative efficiency in the long run equilibrium. Whereas they have dissimilarities such as: Market power and the demand curve. Firms in perfect competition have no market power; they are unable to influence price, since they are price-takers, as reflected in the perfectly elastic (horizontal) demand curve they face (fig a). Firms in monopolistic competition, however, do have some market power (ability to influence price), and this is reflected in their downward-sloping demand curve (fig c). Economies of scale. Firms in perfect competition cannot achieve economies of scale because they are very small. Firms in monopolistic competition may have some small room for achieving economies of scale but only to a relatively small degree as these firms also tend to be relatively small. And Productive and allocative efficiency. Whereas the perfectly competitive firm achieves both productive and allocative efficiency in long-run equilibrium, the monopolistically competitive firm achieves neither. In conclusion, the principal difference between these two is that in the case of perfect competition the firms are price takers, whereas in monopolistic competition the firms are price makers. Perfect competition is not realistic, it is a hypothetical situation, on the other hand, monopolistic competition is a practical scenario. Most of the companies try to maximize profits by establishing product differentiation....