Economics
Perfect Competition vs Monopolistic Competition
Perfect competition is a market structure where many small firms produce identical products and have no market power. Monopolistic competition, on the other hand, is a market structure with many firms producing similar but differentiated products, allowing for some degree of market power. In perfect competition, firms are price takers, while in monopolistic competition, firms have some control over their prices.
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10 Key excerpts on "Perfect Competition vs Monopolistic Competition"
eBook - PDF- Tucker, Irvin Tucker(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
............................................................................................................................................................................................. ............................................................................................................................................................................................... ................................................................................................................................................................................................................. 10-1 THE MONOPOLISTIC COMPETITION MARKET STRUCTURE Economists define monopolistic competition as a market structure characterized by (1) many small sellers, (2) a differentiated product, and (3) easy market entry and exit. Monopolistic competition fits numerous real-world industries. The following is a brief explanation of each characteristic. 10-1a CHARACTERISTICS OF MONOPOLISTIC COMPETITION Many Small Sellers Under monopolistic competition, as under perfect competi-tion, the exact number of firms cannot be stated. But in monopolistic competition, the number of sellers is smaller than in perfect competition. In this market struc-ture, consumers have many different varieties of products from which to choose, and prices are competitive. No single seller has a large enough share of the market to control prices. Ivan ’ s Oyster Bar, described in the chapter preview, is an example of a monopolistic competitor. Ivan assumes that his restaurant can set prices slightly higher or improve service independently without fear that competitors will react by changing their prices or giving better service. Thus, if any single seafood restaurant raises its price, the going market price for seafood dinners increases by a very small amount.
- David Reisman(Author)
- 2013(Publication Date)
- Routledge(Publisher)
2 and that there is more merit in being fuzzily right than in being precisely wrong. In his ambiguous and open-ended way he seems to have treated all four of the principal market structures that figure in contemporary economics textbooks, and it is with these four market structures that we shall be concerned in the four sections of the present chapter.6.1 PERFECT COMPETITION
The theoretical analysis of perfect competition, Stigler says, was long treated ‘with the kindly casualness with which one treats of the intuitively obvious’: ‘It is a remarkable fact that the concept of competition did not begin to receive explicit and systematic attention in the main stream of economics until 1871.’1 Economics rapidly made up for lost time and extensive definitions may be found in books such as Jevons' Theory of Political Economy (1871) and Edgeworth's Mathematical Psychics (1881).2 Marshall's own definition is as follows: ‘A perfect market is a district, small or large, in which there are many buyers and many sellers all so keenly on the alert and so well acquainted with one another's affairs that the price of a commodity is always practically the same for the whole of the district.’3 In such a market, ‘buyers generally compete freely with buyers, and sellers compete freely with sellers’,4 and the outcome of such ‘free competition’ is precisely what we would anticipate: there is ‘only one price on the market at one and the same time’ and no dealer is driven to ‘taking a lower or paying a higher price than others are doing’.5 Always assuming, of course, that four conditions implicit in the definition of the perfect market are satisfied.First , product homogeneity. We must assume that ‘the commodities referred to are always of the same quality’.6 This is the case, for example, with ‘raw produce’ (including the ubiquitous fresh fish), and also with some manufactured outputs - as where the goods in question are ‘so simple and uniform’, so ‘plain and common’, that their production ‘can be reduced to routine’ and their distribution can be ‘wholesale in vast quantities’ (goods like, say, ‘steel rails and calico’ which are available at a multiplicity of different outlets).7 Homogeneity in the sense of the economist must not, however, be confused with homogeneity in the sense of the physicist, as Marshall reflected in an important footnote on the subjective and the objective which occurs in his fragmentary Essay on Value and which reads as follows: ‘Inequalities of price are indeed often more apparent than real. A man who pays four shillings for a pair of gloves which he knows he could have bought in the next street for three, pays three shillings for the gloves and expends the fourth on love of display, on indulgence of old associations, or saving of time. He buys something extra just as much as if the gloves had had extra fancy work upon them.’8
eBook - PDF- William F. Samuelson, Stephen G. Marks, Jay L. Zagorsky(Authors)
- 2022(Publication Date)
- Wiley(Publisher)
In this sense, it would occupy the same cell as perfect competition. However, whereas perfect competition is characterized by firms producing identical standardized products, monopolistic competition is marked by product differentiation. In short, the two dimensions of competition shown in Table 7.1, although useful, do not do the full job in distinguishing different market structures. THE BASICS OF SUPPLY AND DEMAND A thorough knowledge of the workings of supply and demand, and how they affect price and output in competitive markets, is essential for sound managerial decision making. In a perfectly competitive market, price is determined by the market demand and supply curves. We will consider each of these entities in turn. TABLE 7.1 Comparing Market Structures Entry Barriers Number of Firms High Moderate None One Monopoly Not Applicable Few Oligopoly Very Many Not Applicable Perfect Competition The Basics of Supply and Demand 207 The demand curve for a good or service shows the total quantities that consumers are willing and able to purchase at various prices, other factors held constant. 1 Figure 7.1 depicts a hypothetical demand curve D for shoes in a local market. As expected, the curve slopes downward to the right. Any change in price causes a movement along the demand curve. The supply curve for a good or service shows the total quantities that producers are willing and able to supply at various prices, other factors held constant. In Figure 7.1, the supply curve for shoes (denoted by S) is upward sloping. As the price of shoes increases, firms are willing to produce greater quantities because of the greater profit available at the higher price. Any change in price represents a movement along the supply curve. The equilibrium price in the market is determined at point E where market supply equals market demand. Figure 7.1 shows the equilibrium price to be $25 per pair of shoes, the price at which the demand and supply curves intersect.
eBook - PDFMicroeconomics for MBAs
The Economic Way of Thinking for Managers
- Richard B. McKenzie, Dwight R. Lee(Authors)
- 2016(Publication Date)
- Cambridge University Press(Publisher)
426 Competitive and monopoly market structures A market. Indeed, many markets are inhabited by a few large, powerful firms that do not take price as a given. Many firms either are monopolies or possess a high degree of monopoly power. Demanders and suppliers are rarely as well informed as the model suggests. But the model of perfect competition was never meant to represent all, or even most, markets. It is merely one of several means economists use to think about markets and the consequences of changes in market conditions and government policy. We know from the perfectly competitive model that the predicted outcomes of the model hold if there are numerous producers and consumers. However, as noted earlier, it does not follow that if there are fewer – even far fewer – than “numerous” producers and consumers, the predicted outcomes of the perfectly competitive model do not hold. So long as the number of producers and consumers is sufficiently large that no one believes they have control over the price and acts accordingly, the perfectly competitive model can be useful in analyzing and predicting market behavior. Hence, the perfectly competitive outcomes could hold with no more than a couple of dozen producers and consumers in the market (Smith 1962 ). (Still, we take up more real-world markets, called “contestable markets,” in online Reading 10.1 .) Finally, the perfectly competitive market can help us gain insight about production decisions precisely because its required conditions are “unreal.” The model of market competition simplifies the analysis, helping us see with clarity the essential features of competitive markets and showing us exactly how managers can improve their thinking as they consider the complex tasks of achieving maximum profitability and surviva-bility.
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
____________________ WORLD TECHNOLOGIES ____________________ Chapter- 8 Perfect Competition In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction-type markets, say for commodities or some financial assets, may approximate the concept. Perfect competition serves as a benchmark against which to measure real-life and imperfectly competitive markets. Basic structural characteristics Generally, a perfectly competitive market exists when every participant is a price taker, and no participant influences the price of the product it buys or sells. Specific characteristics may include: • Infinite buyers and sellers – Infinite consumers with the willingness and ability to buy the product at a certain price, and infinite producers with the willingness and ability to supply the product at a certain price. • Zero entry and exit barriers – It is relatively easy for a business to enter or exit in a perfectly competitive market. • Perfect factor mobility - In the long run factors of production are perfectly mobile allowing free long term adjustments to changing market conditions. • Perfect information - Prices and quality of products are assumed to be known to all consumers and producers. • Zero transaction costs - Buyers and sellers incur no costs in making an exchange (perfect mobility). • Profit maximization - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit. • Homogeneous products – The characteristics of any given market good or service do not vary across suppliers. • Constant returns to scale - Constant returns to scale ensure that there are sufficient firms in the industry.
eBook - PDFEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
If there are many firms, the degree of competition increases. With fewer firms supplying a good or service, consumers are limited in their market choices. One extreme case is the monopoly market structure, with only one firm supplying a unique good or service. Another extreme is perfect competition, with many firms supplying a similar product. Finally, an example of relative size is the automobile industry, in which a small number of large international producers (e.g., Ford and Toyota) are the leaders in the global market, and a number of small companies either 146 Economics for Investment Decision Makers have market power because they are niche players (e.g., Ferrari) or have little market power because of their narrow range of models or limited geographical presence (e.g., Skoda). In the case of monopolistic competition, there are many firms providing products to the market, as with perfect competition. However, one firm’s product is differentiated in some way that makes it appear better than similar products from other firms. If a firm is successful in differentiating its product, the differentiation will provide pricing leverage. The more dissimilar the product appears, the more the market will resemble the monopoly market structure. A firm can differentiate its product through aggressive advertising campaigns, fre- quent styling changes, the linking of its product with complementary products, or a host of other methods. When the market dictates the price based on aggregate supply and demand conditions, the individual firm has no control over pricing. The typical hog farmer in Nebraska and the milk producer in Bavaria are price takers. That is, they must accept whatever price the market dictates. This is the case under the market structure of perfect competition. In the case of monopolistic competition, the success of product differentiation determines the degree with which the firm can influence price.
eBook - PDFEconomics
Theory and Practice
- Patrick J. Welch, Gerry F. Welch(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
Pure Competition 341 alternative use, and tax laws may make it difficult to sell a farm or pass it on to other family members. With considerations such as these, of what value is the study of pure competi- tion? The purely competitive model helps us better understand the behavior of firms in certain markets. It also provides an ideal against which all real‐world markets can be judged. We cannot understand the extent to which markets are working well or poorly without the ideal of pure competition for comparison. Price Price and Cost P 1 P 2 P 1 P 2 D 0 0 Quantity Quantity Market a. Entry b. Exit Individual Firm LRATC D1 D2 S2 S1 Price Price and Cost P 2 P 1 P 2 P 1 D 0 0 Quantity Quantity Market Individual Firm LRATC D1 D2 S1 S2 FIGURE 13.6 Effect of Entry and Exit of Sellers in a Purely Competitive Market When individual firms in pure competition make an economic profit, new firms are attracted to the market in the long run, causing market supply to increase and equilibrium price to fall. When individual firms operate with a loss, some drop out of the market in the long run, causing market supply to decrease and equilibrium price to rise. Eventually, the price that each firm receives is equal to the firm’s minimum long‐run average total cost. 342 Chapter 13 Competition and Market Structures MONOPOLISTIC COMPETITION Characteristics of Monopolistic Competition The market structure closest to pure competition, and where we can find many real‐world examples, is monopolistic competition. A monopolistically competitive market has ♦ a large number of sellers—not as many as in pure competition, but a large number nonetheless; ♦ differentiated products—buyers can distinguish among the products of different sellers; and ♦ fairly easy entry into and exit from the market.
- Thomas J. Webster(Author)
- 2018(Publication Date)
- Routledge(Publisher)
206 CHAPTER 9 206 C H A P T E R 9 PERFECT COMPETITION AND MONOPOLY In this chapter we will: • Review the standard models of price and output determination under perfect competition and monopoly; • Explore how game theory can provide insights into perfect competition and monopoly; • Discuss the conditions for perfect competition and monopoly under Cournot output-setting behavior; • Review some of the origins of monopoly power; • Introduce the idea of contestable monopolies. INTRODUCTION In economics we assume that decision makers attempt to maximize some objective function subject to one or more binding constraints. This assumption, which is referred to as bounded ra-tionality, asserts that firms endeavor to maximize profit, or some other equally rational objective, such as maximizing market share, subject to a fixed operating budget, resources prices, market structure, and so on. In this chapter we will examine the market extremes of perfect competition and monopoly. In each case, we will begin with a review of the standard models of price and output setting behavior in which an analysis of strategic behavior plays little or no role. This will be followed with a brief discussion of how the principles of game theory may be used to enhance our understanding of these market structures. STANDARD MODEL OF PERFECT COMPETITION In the standard model, the term perfect competition is somewhat misleading since strategic interac-tion between and among firms in the same industry does not take place in the conventional sense. Managers do not explicitly consider the pricing and output decisions of rival firms. This follows from the strict application of conditions for perfectly competitive markets in which the output of any individual firm is very small relative to total industry supply. Each perfectly competitive firm is said to be a price taker. The market price is parametric to the output decision-making process.
- Roberto Serrano, Allan M. Feldman(Authors)
- 2018(Publication Date)
- Cambridge University Press(Publisher)
Part III Partial Equilibrium: Market Structure 11 Perfectly Competitive Markets 11.1 Introduction In this chapter, we put together consumers interested in buying a good and firms interested in selling the good. We will start out by describing what we mean by perfect competition; this requires price-taking behavior by all parties, homogeneous goods, perfect information, and free entry and exit in the long run. We will derive industry supply curves in the short run and in the long run. With consumers’ actions aggregated into an industry demand curve, and firms’ actions aggregated into an industry supply curve, we will discuss excess demand and excess supply. Then we will describe the competitive market equilibrium. We will then turn to the welfare properties of the market equilibrium. We will define producer’s surplus for a single firm and producers’ surplus for all the firms in the market. We will show how the competitive market equilibrium maximizes social surplus; that is, the sum of consumers’ surplus and producers’ surplus. Finally, we will analyze the deadweight loss , or loss in social surplus, created by a per-unit tax on the good being sold in the market. We will use the idea of the market demand curve, developed in Chapter 4 , and the idea of consumers’ surplus, developed in Chapter 7 . We will also extend the welfare economics analysis of Chapter 7 , but this time with an eye on both the consumers and the producers of the good. 11.2 Perfect Competition As in Chapters 8 through 10 , we are focusing on competitive firms . A firm is compet-itive if it takes prices as given, that is, beyond its control. A market is competitive if all the agents in that market (that is, all the buyers and all the sellers) take prices as given; that is, beyond their control. The idea of competitive markets is fundamental in economic thinking, but it is, of course, an ideal, and the reality is often different. It is useful to study an ideal even if the reality differs.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
If a perfectly competitive firm attempts to charge even a tiny amount more than the market price, it will be unable to make any sales. In a perfectly competitive market there are thousands of sellers, easy entry, and identical products. A short-run production period is when firms are producing with some fixed inputs. Long-run equilibrium in a perfectly competitive industry occurs after all firms have entered and exited the industry and seller profits are driven to zero. Perfect competition means that there are many sellers, there is easy entry and exiting of firms, products are identical from one seller to another, and sellers are price takers. 8.2 How Perfectly Competitive Firms Make Output Decisions As a perfectly competitive firm produces a greater quantity of output, its total revenue steadily increases at a constant rate determined by the given market price. Profits will be highest (or losses will be smallest) at the quantity of output where total revenues exceed total costs by the greatest amount (or where total revenues fall short of total costs by the smallest amount). Alternatively, profits will be highest where marginal revenue, which is price for a perfectly competitive firm, is equal to marginal cost. If the market price faced by a perfectly competitive firm is above average cost at the profit-maximizing quantity of output, then the firm is making profits. If the market price is below average cost at the profit-maximizing quantity of output, then the firm is making losses. If the market price is equal to average cost at the profit-maximizing level of output, then the firm is making zero profits. We call the point where the marginal cost curve crosses the average cost curve, at the minimum of the average cost curve, the “zero profit point.” If the market price that a perfectly competitive firm faces is below average variable cost at the profit-maximizing quantity of output, then the firm should shut down operations immediately.
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