It meets the following criteria all firms are price-takers, all firms have a relatively small market share, buyers know the nature of the product being sold and the prices charged by each firm, there is a complete freedom of entry and exit. While monopoly and perfect competition mark the extremes of market structures there are many point of similarity. The cost functions and shutdown decisions are the same. Both firms aim at maximizing profit. But there are many differences among the two:- 1.
Price In a perfectly competitive market price equals marginal cost. In a monopolistic market price is greater than marginal cost. 2. Product differentiation: There is zero product differentiation in a perfectly competitive market. Every product is perfectly homogeneous and a perfect substitute. With a monopoly there is high to absolute product differentiation in the sense that there is no available substitute for a monopolized good. 3. Marginal revenue and price In perfectly competitive market marginal revenue equals price.
In a monopolistic market marginal revenue is less than price. 4. Supply Curve In a perfectly competitive market there is a well defined supply function with a one to one relationship between price and quantity supplied. In a monopolistic market no such supply relationship exists 5. Number of competitors: PC markets are populated by an infinite number of buyers and sellers with possibility of free entry and exit. Monopoly involves a single seller. 6. Market Power: Perfectly competitive PC firms have zero market power when it comes to setting prices.
All firms in a PC market are price takers. The monopolist on the other hand is the price decider. He has the ability to decide the price though it is limited by downward sloping demand curve that he faces. 7. Demand curve: The demand curve for a firm in perfect competition is purely elastic, where as a monopolist faces a downward sloping demand curve governed by law of demand. The perfect competition has an advantage that the firm does not make supernormal profits. Hence, the prices available to the consumers are lowest possible.
Also, there is no dead weight loss since all the profit goes as consumer or producer surplus. But perfectly competitive market is stagnant because of lack of development of the product since no firm invests in development because of lack of capital. In monopoly, though there is a scope for product development, but the social welfare is reduced , since the prices are high and there is a dead weight loss. Hence neither of two is good for society. The best economy would be a mixture of monopoly and perfect competition. Written by: Prashant Joshi 2008EE10355 Grp 3.