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DIFFERENCES BETWEEN MONOPOLISTIC COMPETITION AND MONOPOLY MARKET
STRUCTURE
Monopolistic competition and monopoly are two market structures existing on rather two
extremities of the market structure analysis. In this essay I will give their definitions,
discussing their characteristics, giving their differences and concluding with an overview of
what I have been able to achieve.
Amos WEB (2000 -2010) defines Monopolistic competition as a market structure in which a
large number of firms manufacture and produce not necessarily the same product but similar
products but still maintain a substantial amount of profit. For example, the manufacturing of
pens, firms manufacturing these can be said to exist in a monopolistic competition market
whe re four or more firms manufacture the same product or similar products in this case
pens. There is freedom of entry and exit and extensive knowledge of prices and technology.
The diagram above represents monopoly
competition. It has four characteristics, which are:
1. Large number of small firms: This market contains large numbers of comparatively
small firms when compared to the size of the market. This gives for high rate of
competition and little control over price or quantity.
2. Extensive but not perfect knowledge: in this competition buyers are not open to
everything; they have relative information about alternative prices and complete
information about product differences.
3. Similar but not identical products: the goods sold by firms in this market system are
close substitutes but not perfectly identical. These goods satisfy the same basic wants
and needs and can have subtle or noticed differences.
4. Imperfect resource mobility: firms in this market system are not hindered by
government rules and regulations, there is freedom of entry and exist and there are
few barriers to entry.
On the other hand, monopolistic market is defined by Yogesh Ambekar (2000-2009 at
buzzle.com) as a situation whereby one firm produces a particular service generally without
any close substitutes or similar products, and the firm makes maximum profit in an
industry. An example of this is the Microsoft Company owned by Mr. Bill Gates; in this case
he has taken advantage of this market completely.
The diagram above represents the monopolistic competition market.
Its characteristics are in direct contrast with that of monopolistic competition, they are:
1. Single firm possessing sole ownership of a product: there is only one existing firm
selling only one product with no substitutes.
2. Restrictions of entry into and exit out of this industry: entry and exit into and out of
this market is restricted by either legal or natural causes.
3. One unique product: the product being produced is unique and has no close
substitutes or competition.
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4. Information is not easily accessible: this is not available to other prospective
producers as product is unique and there are barriers to entry and exit.
This two market systems are very different and their differences are:
1. There exists only one producer of a unique product in monopoly while in
monopolistic competition there can be hundreds of producers producing the same
or closely similar products or services. In monopoly one particular firm makes 100%
of the markets profit while profit has to be shared among many firms in
monopolistic competition.
2. In the short run, firms in a monopolistic competition market can behave like
monopolized firms, but in the long run other firms are introduced into the market and
it becomes similar to perfect competition but does not shut down or loose profit
completely as it maintains spare capacity.
3. Firms in monopoly posses market power, i.e. the ability to increase price of the
product without losing buyers to another supplier or producer of the same product.
This is because firms in monopolized market are the main suppliers or producers of
such goods or services and there are no close substitutes for such products therefore
leaving consumers with no choice, but in a monopolistic market, market power is not
possessed by any firm as this will make them loose profit and buyers to a producer of
the similar product.
4. In monopolistic competition there is little or no product differentiation and products
are almost homogenous, but in monopoly product differentiation is very high due to the
fact that there is no available substitute for product being produced.
5. The numbers of buyers and sellers differ greatly in that monopoly has only one seller
of a product while monopolistic competition has more than four buyers and sellers.
6. In monopolistic competition market there are little or no barriers to entry. Barriers to
entry are laws or restrictions put in place either legally or naturally to avoid
competition from other firms. In monopoly barriers to entry are greatly present in
order for a firm being the main producer of a product to continue that way.
7. In the short run, firms in monopolistic market can make excess profit but this reduces
as the excess profit attracts other firms and is finally reduced to its barest minimum.
While a monopoly firm can preserve excess profit for a long time as barriers to entry
prevent other firms from entering into the industry.
The diagram above represents monopolistic competition in the short run and long run.
8. A monopoly firm would have a relatively inelastic demand curve, while a
monopolistic competition firm would have a perfectly elastic demand curve.
9. In monopoly there is no pricing pressure from other competitive firms unlike the
monopolistic competition that faces pricing pressure due to the numerous numbers of
firms in this market structure. Pricing pressure is if the price of a good should affect
another negatively or positively.
In conclusion, there exist a lot of differences between monopolistic competition and
monopoly, although this firms have similarities, their differences are said to outweigh them. In
this essay I have discussed and defined the meanings of monopoly and monopolistic
competition and diagrams that help us understand this market structures, given its
characteristics and also its differences.
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REFERENCES
Amos WEB (2000-2010) Monopolistic competition. Retrieved 5th of may 2010
at
http://www.amosweb.com/cgibin/awb_nav.pl?s=wpd&c=dsp&k=monopolistic+competition
Amos
WEB
(200-2010)
Monopoly.
Retrieved
5th
http://www.amosweb.com/cgi bin/awb_nav.pl?s=wpd&c=dsp&k=monopoly,+characteristics
of
May
2010
Yogesh Ambekar (2009) what does market monopoly mean? Retrieved 5th of May
2010 at http://www.buzzle.com/editorials/1-13-2005-64198.asp
Wikipedia (2009-2010) Monopoly and monopolistic market. Retrieved 5th of May 2010 at
http://en.wikipedia.org/wiki/Monopoly”Market_structures
at