Difference Between Monopoly and Monopolistic Competition

Edited by Diffzy | Updated on: June 06, 2023

       

Difference Between Monopoly and Monopolistic Competition

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Introduction

A market is made up of buyers and sellers from an economic standpoint. The buyer acquires goods or services from the vendor, and the merchant then attempts to market his goods.

When there are lots of vendors and no government intervention, it leads to intense competition. There are two sorts of contests in a market: perfect and imperfect competitions.

A situation in which the price of an item is not under the influence of individual vendors and purchasers is referred to as perfect competition. An imperfect competition situation occurs when either the consumer or the seller has price control over a commodity. Imperfect competition is classified into three types: monopoly, oligopoly, and monopolistic competition.

Monopoly vs Monopolistic Competition

The key distinction between monopoly and monopolistic competition is the firm's level of market power. In a monopoly, only one company controls every market for a specific product or service. The company has full authority over the product's pricing and quantity, and there are no comparable alternatives accessible.

Monopolistic competition, on the other hand, is a market system in which numerous enterprises sell differentiated items. Each firm has some market power, but competition is not as fierce as it would be in a totally competitive market. Because there are close substitutes for each firm's product, firms cannot set costs as high as they might in a monopoly.

Difference Between Monopoly and Monopolistic Competition in Tabular Form

BASIS OF COMPARISONMONOPOLY COMPETITIONMONOPOLISTIC COMPETITION
MeaningIt is a market condition in which there is just one vendor selling a product that has no close substitutes.It is a market setting in which many enterprises sell closely related, differentiated products.
Number of sellersThere is only one seller in this market.There are a lot of sellers in this market.
CompetitionThere is no competition for the vendor.Because there are few players, there is minimal competition, but not enough to control the demographics.
PriceBecause the firms in this market set their own prices, there is a risk of price discrimination.Because of product differentiation, corporations have some price control.
EffectBecause of the single-player monopoly, the seller controls the products, their availability and demand, and the price - the customer has little control.Because there is little competition, the buyer has some say.
Entry and exitIn such a market, entry and departure are extremely tough.It's a lot easier.
Variety in productDepending on the vendor, variations in a particular product can occur or not.Variants are manufactured by the various market participants.

What Is Monopoly Competition?

A market structure in which a firm has complete control over the production and sale of a product or service with no near substitutes. A monopolized market is one in which a single vendor sells a product with no near alternatives to many purchasers. Because the firm and the industry are the same things in a monopoly market, it is a separate-firm industry. A monopoly product has zero or negative cross-elasticity of demand. A monopoly exists in public utilities such as telephone and electricity.

A firm is the price setter in this marketing context; however, the pricing of the product is accomplished by taking into consideration the elasticity of demand for the good, so that demand for the product and profit are maximized.

Characteristics of Monopoly Competition

A monopoly has qualities that distinguish it from other market arrangements. These are the characteristics:

Single seller - A single seller has complete control over the manufacture and sale of a certain offering. This also implies that the seller has no competitors and controls the complete market share of the offering in question.

No comparable or close substitutes - The monopolist creates a product or service that has no comparable or close substitute.

Hurdles to the entrance - In a monopoly market structure, new firms are unable to enter the industry due to hurdles such as government rules, contracts, insurmountable production costs, and so on.

Price maker - A monopolist has the authority to charge any price for its product or service.

Types of Monopoly Competition

The pure monopoly: A pure monopoly is a single vendor in a market or industry with substantial entry barriers, such as large beginning costs, whose product has no competitors.

The Microsoft Corporation was the very first to have a monopoly on operating systems for personal computers. As of 2022, its desktop software for Windows had a 75% market share.

The Natural Monopoly: A natural monopoly forms when a company relies on unique raw supplies, technology, or specialization. Pharmaceutical businesses, for example, are regarded natural monopolies because they have patents or incur significant R&D costs.

Public Monopoly: In the utility industry, for example, just one company typically distributes energy or water to an area. The monopoly is permitted and closely regulated by government municipalities, as are rates and rate hikes.

Imperfect Monopoly: The monopolist dominates the entire market supply for its product because there is no close substitute available in the market, but there is a distant substitute for the product accessible in the market.

Simple monopoly: A simple monopoly exists when a single vendor sells its product or commodity for a single cost. A basic monopoly has no price discrimination.

Discriminating Monopoly: A discriminating monopoly exists when a single vendor does not sell his goods or services at the same price. Price discrimination is seen in which prices vary from region to region, or people from various economic backgrounds are charged a different price, and so on.

Legal Monopoly: A legal monopolist has government-approved rights such as trademarks, patents, copyright, and so on.

Technological Monopoly: A corporation is said to be a technological monopoly if it has a technologically superior position that other enterprises cannot compete with.

Joint or Shared Monopoly: A joint or shared monopoly is formed when two or more enterprises join forces to form a monopoly.

Example of Monopoly Competition

Although an ideal monopoly market is difficult to find in practice, we can look at some examples in the government sector. Government-provided infrastructure, such as trains between cities, remains a monopolistic market. There is no competition, and all product-related qualities are at the discretion of the government.

What Is Monopolistic Competition?

Monopolistic competition refers to a market system in which many sellers sell a differentiated product. Products can be distinguished by the name of the company, packaging, form, size, design, trademark, and so on. Although the products sold by various companies in the industry are not identical, they are close substitutes for the rivals. Monopolistic competition is common in the manufacturing industry, which includes tea, shoes, refrigerators, toothpaste, television sets, and so on.

The following are the key characteristics of monopolistic competition:

  • There are a lot of sellers.
  • Differentiated products that are also close equivalents.
  • The industry allows for free admission and departure.
  • Excellent factor mobility
  • Complete understanding of market conditions.
  • Under this scenario, consumers buy more when product prices are lower than when prices are higher.

Characteristics of Monopolistic Competition

Free entry and exit from the market

Free entry into an economic market means that a company can begin selling a good or service with few obstacles to entry, but free departure means that a company can quit a market relatively freely if it incurs monetary losses. Although starting a business has costs, the flexibility of monopolistic competition enables companies to enter and exit relatively easily. This is critical because once one company earns profits, new businesses frequently want to enter the market and reap the same benefits, necessitating enterprises to plan for competition influencing their own earnings.

Product Distinction

Monopolistic competition is distinguished by the fact that the items sold by enterprises in this structure are similar yet somewhat different. Depending on the demands of each organization, these distinctions may be tangible or fake.

Within a city, for example, there could be four separate pizzerias. The pizzas they sell may be similar in that they all contain dough, sauce, cheese, and toppings and are cooked and prepared in essentially identical ways. For a customer to choose one pizza over another, each firm must establish strategies to differentiate their product, such as distinctive marketing, deals, or location.

Pricing

Companies engaged in monopolistic competition operate as price makers, determining the prices of goods and services. Monopolistic firms can raise or cut prices without igniting a price war, which is common in oligopolies.

Elasticity of Demand

In monopolistic competition, demand is very elastic and highly responsive to price fluctuations. For things such as laundry detergent, consumers will switch from one brand to another based only on price increases.

Profits

Companies may achieve enormous profits in a monopolistic rivalry market in the near run. This is frequently due to consumers' desire to try a new brand or to take advantage of fresh bargains. As more firms enter the market, many firms' profits fall to more normal levels. Companies can change this by innovating, differentiating their offerings, or exiting the market entirely. Because of the low barrier to entry and exit, many companies enjoy short-term gains but face competition that may reduce their margins.

Example of Monopolistic Competition

Most consumer goods are subject to monopolistic competition in perfect marketplaces. Because there are only a few sellers, demand-supply-price structures are elastic. Consider cosmetics, grocery items, clothing, or pharmaceuticals as examples of daily necessities.

Pros and Cons of Monopolistic Competition

Monopolistic competition has both advantages and disadvantages for businesses and consumers.

Pros:

  • There are few hurdles to entry for new businesses.
  • Consumers have a wide range of options.
  • Pricing and marketing decisions are made by the company.
  • Consistent product quality for customers.

Cons:

  • The presence of numerous competitors restricts the use of economies of scale.
  • Inefficient firm marketing, packaging, and advertising spending
  • Consumers who have too many options must conduct additional research.
  • Consumers may be misled by misleading advertising or receive incomplete information.

Key Differences Between Monopoly and Monopolistic Competition in Points

In terms of the distinction between monopoly and monopolistic competition, the following points stand out:

  1. A monopoly is a market system in which a single seller produces/sells a product to many purchasers. Monopolistic competition refers to a competitive market environment in which numerous suppliers supply differentiated products to many purchasers.
  2. A monopoly market has a single seller/producer, but monopolistic competition might have two to 10 or more players.
  3. In a monopolistic market system, the seller offers a single product with extreme product differentiation. On the contrary, there is limited product differentiation under monopolistic competition because the products offered by different sellers are close replacements.
  4. The degree of price control in a monopoly market is significant but regulated. under contrast, there is some price control under monopolistic competition.
  5. A monopoly market has no competition, whereas a monopolistic competitive market has fierce competition because of non-price competition between enterprises.
  6. In a monopoly, demand for the product is inelastic because there are no close substitutes. As opposed to monopolistic competition, because the products offered by multiple sellers are comparable rather than identical, demand is very elastic.
  7. Due to economic, legal, and institutional factors, monopolies have substantial entrance and exit barriers. Monopolistic competition, on the other hand, allows for unrestricted access and exit from the industry.
  8. In a monopoly, there is no distinction between firm and industry because a single firm regulates the entire market. As a result, it is a single-firm industry. Unlike monopolistic competition, there is a distinction between firm and industry; a firm is a single entity, while an industry is a group of enterprises. In a monopoly, there is no distinction between firm and industry because a single firm regulates the entire market. As a result, it is a single-firm industry. Unlike monopolistic competition, there is a distinction between firm and industry; a firm is a single entity, while an industry is a group of enterprises.

Conclusion

Monopolistic competition is an international phenomenon that can be found in practically every market area. It expands the breadth of elasticity in prices for commodities, allowing customers to form supply patterns based on their needs. Although monopoly is extreme and scarce in today's environment, it is not entirely absent.

While every company would like to have a monopoly, a thriving market ought to constantly include healthy monopolistic competition.


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"Difference Between Monopoly and Monopolistic Competition." Diffzy.com, 2024. Thu. 29 Feb. 2024. <https://www.diffzy.com/article/difference-between-monopoly-and-monopolistic-competition>.



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