Difference Between Monopoly and Monopolistic Competition with Examples
Introduction
Market, by its very nature, leads to the formation of both perfect and imperfect competition within it. Imperfect competition can be further categorized into oligopoly, monopoly, and monopolistic competition.
Let's find out more about monopoly and monopolistic competition!
What is a Monopoly?
Monopoly has such a type of market structure, where there is only one firm present in it. This firm enjoys absolute power in producing and selling the product or service. Products offered in a monopoly market do not have any close substitutes.
Monopoly is most likely to be found in the public utility sector.
Also, the combined effect of various characteristics of the monopoly market ensures that the market player is a sole price setter. Buyers cannot influence prices. Price is set by the firm taking into account the demand elasticity of a product, product demand, and maximization of profit.
Example of Monopoly
An instance of monopoly competition can be found in the government sector. Government has a monopoly over infrastructure such as dams, railways etc.
These sectors count as a monopoly market with the government as the only entity because the competition is non-existent. The characteristics of the services and products in such a market are determined by the government.
What is Monopolistic Competition?
Monopolistic competition is the market setting that includes differentiated products offered by a handful of sellers present in the market. Product differentiation is undertaken through packaging, brand name, trademark etc.
Monopolistic competition is evident in the manufacturing industry.
The characteristics of monopolistic competition such as differentiated products and a handful of sellers influence the prices of products or services. Consumers in a monopolistic market buy more products when prices are comparatively lower. Firms set product prices, taking into consideration marginal cost and revenue as well as profit maximization.
Example of Monopolistic Competition
Monopolistic competition can be seen on television programmes. With the advent of globalization, consumers have greater choice in the variety of shows from which to choose. The television programmes offered across the world are also diverse. However, there are only a few companies that broadcast those shows.
Major differences between monopoly and monopolistic competition have been discussed below.
Monopoly vs Monopolistic Competition
It can be understood that, in a monopoly market, the seller has the discretion to charge different prices to different sets of customers. It is known as price discrimination. However, in monopolistic competition, there exists non-price competition. Sellers in this market cannot adopt a price discrimination policy for their customers.
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FAQs on Monopoly vs. Monopolistic Competition: Key Differences
1. What is a monopoly market structure?
A monopoly is a market structure defined by a single seller or producer that dominates the entire market for a particular product or service. Key characteristics include the absence of any competition, the existence of a unique product with no close substitutes, and significant barriers to entry that prevent other firms from entering the market. The monopolist is a price maker, having considerable control over the price of its product.
2. What defines monopolistic competition as a market form?
Monopolistic competition is a market structure where a large number of firms compete with each other by selling products that are similar but not identical. The core feature is product differentiation, achieved through branding, quality, design, or packaging. This gives each firm a mini-monopoly over its version of the product, allowing for some control over price. Entry and exit into the market are relatively easy.
3. What are the key differences between monopoly and monopolistic competition?
The primary differences between a monopoly and monopolistic competition are:
- Number of Sellers: A monopoly has only one seller, while monopolistic competition has many sellers.
- Product Nature: A monopoly offers a unique product with no close substitutes. Monopolistic competition involves differentiated products that are close substitutes.
- Competition: There is no competition in a monopoly. In contrast, monopolistic competition is defined by intense competition, especially non-price competition (like advertising).
- Control over Price: A monopolist has significant control over price, whereas a firm in monopolistic competition has limited control due to the availability of substitutes.
- Barriers to Entry: Entry is blocked or highly restricted in a monopoly, but it is relatively free in monopolistic competition.
4. What are some real-world examples of monopolistic competition?
Monopolistic competition is very common in consumer markets. Good examples include:
- The market for restaurants and cafes, where each offers a unique menu, ambiance, and service.
- The hairdressing and salon industry, with each offering different styles, skills, and branding.
- The market for clothing and apparel, where numerous brands compete with distinct designs, quality, and brand image.
5. How do the demand curves for a monopoly and monopolistic competition differ?
The demand curve for both market structures is downward-sloping, but the key difference lies in their elasticity. A monopolist faces the entire market demand, which is relatively inelastic, giving it more pricing power. A firm in monopolistic competition faces a more elastic demand curve because consumers can easily switch to a competitor's similar product if the price increases too much.
6. Why is non-price competition (like advertising) so important in monopolistic competition but absent in a monopoly?
Non-price competition is crucial in monopolistic competition because it is the primary way firms differentiate their products and build brand loyalty in a crowded market. Since products are close substitutes, advertising and branding help a firm convince consumers its product is superior, thereby creating a perceived difference and attracting customers. A monopolist does not need to engage in such competition because it is the sole provider and faces no direct rivals.
7. Can a firm in monopolistic competition earn supernormal profits in the long run, similar to a monopolist?
No, a firm in monopolistic competition cannot earn supernormal profits in the long run. While it can earn them in the short run, the free entry of new firms into the market erodes these profits over time. New entrants, attracted by the profits, introduce more substitutes, which shifts the existing firm's demand curve to the left. This process continues until firms only earn normal profits. A monopolist, protected by high barriers to entry, can sustain supernormal profits in the long run.
8. How is monopolistic competition different from perfect competition, despite both having many firms?
While both market structures feature many firms and free entry, the crucial difference is product nature. In perfect competition, all firms sell an identical, homogeneous product, making them price takers. In monopolistic competition, firms sell differentiated products. This differentiation gives each firm some degree of market power and allows it to have a downward-sloping demand curve, unlike the perfectly elastic (horizontal) demand curve in perfect competition.
