Monopoly and Perfect Competition Market
Market structures experience several types of
competition. The two major types are the monopolistic competition and perfect
competition. In perfect competition market, the firms deal in identical
products whereas in monopolistic competition the products that the firms deal
in are almost non-substitutable. The article herein will tend thus to highlight
the differences and similarities between the two mentioned types of market
Nature of profits
Under monopolistic competition, the firms
generate supernormal profits within a short period. However, after a short
period, the existence of the supernormal profits disappears. In a perfect
competitive competition, the firms make normal profits. Because of the
differences in profit generation within a short period, it is evident that the
perfectly competitive markets have the least market power and the monopolies
have the most market powers (Carlton et al., 2015, np). The differences in the market power yield the
differences in the outcome, with perfect competitive firms having the most
efficient outcome and the monopolies have the least efficient outcome. Therefore,
to increase the outcome efficiency, the goal should be to reduce monopolistic
power by increasing the level of competition in the monopolistic market.
Innovation levels in the perfect competition
versus the Monopolistic competition
Innovation in any business environment is inevitable.
The technological changes push for innovation in any business premises. For
instance, the development of new technology which reduces the average cost of
production of an existing product. In a perfectly competitive market, the long
run equilibrium the profits equal zero (Kirzner, 2015). Innovation in a perfectly competitive market,
therefore, equates to an increase in profits. However, in the long run, the
profits levels will equate to zero, since the competing partners will copy the
innovation, therefore, forcing the profits levels to stabilize. In a
monopolistic market, on the other hand, innovation leads to increase in profit
levels. However, since in monopolistic market there is no competition due to
the existence of entry barriers, the firms will retain their increased profits
in the long run and they would thus have a significant incentive to innovate.
In the above analysis, an assumption has been made that in the competitive
market, the innovative firm cannot protect its innovation through the
deployment of a patent system. Hence, innovation in a perfectly competitive
market is less efficient due to its lack of incentive to innovate while in a
monopolistic competition there is high efficiency because of the existence of
the incentives to innovate.
In a perfect competition market, homogeneous
goods are produced and sold at a flat rate. On the other hand, in a
monopolistic market, different firms produce their unique product, and hence
they must bear the expenses on the selling costs (Mahoney,
and Weyl, 2014). Monopolistic
firms, impose the selling costs on their customers.
A natural monopoly occurs when a single firm
can produce a similar product to other smaller firms but at a cheaper average
cost. Since the single businesses do have lower average costs of production
compared to the smaller firms, the larger firms will always drive the less
cost-effective smaller firms out of the market, hence a natural monopoly.
However, a competitive market comprising of smaller firms will averagely have a
higher cost of production and will impact negatively on the final cost of the
product in the market. Hence, the competitive market is not always efficient as
it supposed and natural monopoly helps with market price regulation.
Carlton, D.W. and Perloff, J.M., 2015. Modern
industrial organization. Pearson Higher Ed.
Kirzner, I.M., 2015. Competition and
entrepreneurship. University of Chicago press.
Mahoney, N. and Weyl, E.G., 2014. Imperfect
competition in selection markets. Review of Economics and Statistics, (0).