Difference Between Perfect and Monopolistic Competition

In a perfect competition market, there are many competitors, barriers to entry are very low, products that are sold are homogenous and identical, absence of non-price competition. However, whereas monopolistic competition is dominated by a single seller and the competition is zero, barriers to entry are also low, sold products can have substitutes, and non-price competition is also present.

Many small firms manufacture and supply the same goods (or perfect substitutes) to the end-user in perfect competition. Small firms mean each firm is too small to influence the product’s market price.

Monopolistic competition is whereby a handful of sellers offer a particular product leading to minimal competition. However, each seller's variants and quality of products are slightly different.

• In the perfect competition market, each firm sells a homogenous product (or perfect substitute), whereas, in monopolistic competition, each firm will have a slightly different output from the other.
• Since products are slightly different from each other in the monopolistic market, non–price competition, like advertising and promotion, exists in the monopolistic market to inform buyers about the quality of the product.
• Since the products are slightly different in the monopolistic market, pricing power exists quickly until new players enter the market to exploit the pricing power.
• In perfect competition, marginal revenue is equal to average revenue. Total revenue is defined as a price per unit multiplied by units sold. Therefore, the average revenue will be similar to that divided by units sold. Marginal revenue is defined as the change in the total revenue by selling an additional unit. Average revenue equals marginal revenue in the perfect competition since all the teams are sold equally.

• In monopolistic competition, any firm can have pricing power for very little time as any signal of supernormal profit would attract other firms to enter the market. Therefore, if a firm in the monopolistic market wants to sell more of its product, that firm will have to decrease the price. Hence, the average revenue will decrease with the quantity sold. Also, as we all know, the demand curve is downward sloping from left to right, so the firm will have to decrease the product's price to sell an additional. That is why marginal revenue is diverging wider and lower than the monopolistic market's average revenue.

To understand these competitions better, let us discuss an example. You might have seen different brands of running shoes in the market. What differentiates them from each other is the uniqueness of each shoe brand. The difference in the product is informed to buyers through advertisement and promotion (non-price competition), as shown in the table above. Having understood the perfect and monopolistic competition, we cannot easily differentiate between the two!

As stated earlier, this particular topic is one of the very prominent topics covered extensively in microeconomics. Hence, it helps managers and business leaders analyze and understand the prevailing situation in the market to make vital decisions.

There is no end to any analysis because the differences between the research might vary from one analyst to another depending upon their approach and objective. Moreover, the strategy and goal of the management might rely upon the time horizon. For example, short-term and long-term. We hope this article clarifies perfect and monopolistic competition by thinking on the same line.

This has been a guide to Perfect competition vs. Monopolistic competition. Here, we discuss the top differences with infographics and a comparison table. You may also have a look at the following articles: -

• Monopoly vs Monopolistic Competition
• Elastic vs Inelastic Demand Differences
• Positive Economics vs Normative Economics
• Macroeconomics vs Microeconomics