Monopoly vs. Perfect Competition: Key Market Differences

Monopoly vs. Perfect Competition

The main differences between a monopolist and a competitive firm are that in the case of a monopoly, there is greater scope for establishing the price, although this control is not absolute. The monopoly firm has more freedom to adjust both the price and the quantity produced in their attempt to maximize profits.

Social Impact and Price Discrimination

From society's point of view, a monopoly involves less desirable effects than those derived from economic competition. In general, a monopoly results in lower production of goods and services than would result under competitive conditions, often with higher prices. Another common practice of a monopoly is price discrimination, which involves charging different prices for the same goods or services depending on the segment of the buying market.

Assumptions of Perfect Competition

The assumptions that characterize the model of perfect competition are:

• There is a large number of companies in the industry and a large number of consumers.
• The product launched by every company is homogeneous.
• There are no barriers to entry or exit for new businesses.
• Firms maximize profits period by period.
• No government intervention.
• There is perfect mobility of production factors, both geographically and sectorally.
• The agents have perfect information about market conditions.

Short-Term Balance in Competitive Firms

The three conditions of short-term balance for a competitive firm are:

1. Make price equal to marginal cost.
2. That costs grow faster than revenue.
3. That the price is higher than the average variable cost.

The Supply Curve and Point of Closure

The supply curve of the perfectly competitive firm in the short term is the marginal cost curve from the minimum average variable cost. The volume of output corresponding to the price at or less than the minimum average variable costs—if this is repeated—is called a point of closure.

Resource Allocation Outcomes

The allocation of resources that results from perfect competition implies:

• Output occurs at the minimum cost feasible.
• Consumers pay the lowest price possible.
• Plants are used to full capacity in the long term.
• Companies do not earn excess profits.

Assumptions of the Monopoly Model

The assumptions offered by the monopoly model are:

• There is only one company.
• The product is consistent, and no close substitutes exist for the product.
• There are barriers to entry into that market, and the firm maximizes benefit period by period.
• No government intervention.
• The monopolist has perfect knowledge of market conditions.
• There is perfect mobility of factors.

Equilibrium and Optimum Conditions

The conditions of equilibrium and optimum in the short term are:

1. Marginal revenue equals marginal cost.
2. That costs grow faster than revenues within the production volume environment.
3. That the price covers at least the variable costs.