Difference Between Monopolistic Competition and Monopoly

Introduction to Monopolistic Competition

Monopolistic competition refers to a market system in which several firms operate within an industry, producing comparable yet distinct goods. Every corporation functions autonomously, disregarding the acts of its competitors, and none of them has a monopoly.

One type of imperfect competition is seen in the market structure.

Characteristics of Monopolistic Competition

The following are the traits of monopolistic competition:

1. The existence of several businesses
2. Every business creates goods that are comparable but unique.
3. Businesses don't take orders.
4. Unrestricted entrance and departure within the sector.
5. Businesses compete on the basis of product quality, pricing, and marketing strategy.
6. Businesses engaged in monopolistic competition gain money in the short term, but they lose money over time. The industry's openness to newcomers and exits has contributed to the latter as well. In the long run, stronger competition, cheaper pricing, and higher output result from short-term economic profits drawing in new competitors.
7. Short-term economic losses eventually result from such a situation, which unavoidably reduces economic gains. Increased prices and profits result from the ability to leave the market owing to ongoing economic losses, therefore ending those losses.
8. Companies operating with existing surplus capacity in monopolistic market structures are also inefficient both productively and allocative. Every participant maintains a tiny market share and has little control over the pricing of the goods because of the sheer number of enterprises in the market. So, it is difficult for businesses to collude with one another.
9. Furthermore, diversity and innovation are key components of monopolistic competition. To appeal to their target consumers, companies need to continually spend on product development, advertise, and expand the variety of items they provide. Thus, quality, pricing, and marketing become the main points of competition with other businesses.
10. Design and service are components of quality. Consequently, businesses that can raise the quality of their goods may also raise their prices and vice versa. Marketing is the employment of various forms of packaging and advertising on a product to raise its attractiveness and level of awareness.

Sectors Displaying Characteristics of Monopolistic Competition

The following are some examples of industries with monopolistic competition:

1. Clothes and attire
2. Sportswear items
3. Dining establishments
4. PC makers for hairdressers
5. Television programmes
6. Quick Decisions Regarding Price and Output

Short-run Choices Concerning Production and Cost

Marital revenue (MR) equals marginal cost (MC) to maximize profits. The company's equilibrium production is found at this stage. The average revenue (AR) curve, which is also the demand curve, is met by the imaginary line drawn from the equilibrium output at the point where the MR, MC, and price curves cross.

The rectangle with the color blue in the following illustration represents the total profit. The difference between the average revenue (AR) and average total cost (ATC) multiplied by the equilibrium production determines it. Similar to monopolistic businesses, those engaged in monopolistic competition make short-term judgments about their prices and output.

As the following example shows, businesses engaged in monopolistic competition may also suffer short-term financial losses. At the point when MR equals MC, where losses are minimized, they continue to create equilibrium output. The rectangle in blue hue represents the monetary loss suffered.

Long-Term Price and Production Decisions

Even in monopolistic competition, firms eventually reach a point of production where their marginal costs and revenues are equal. But, because more businesses are joining the market, the demand curve will have moved to the left. Less demand for a particular company's products as a consequence of heightened competition causes the demand curve to change.

Depending on how many new participants enter the market, such an activity lowers economic profits. It will no longer be possible for individual businesses to charge more for their goods than they should.

In monopolistic competition, businesses will never make a profit. There isn't any motivation for new players in the market right now.

Monopolistic Competition's Inefficiencies

1. Customers pay more when the price exceeds marginal revenue, which is the equilibrium production at the profit maximization level (MR = MC) in monopolistic competition.
2. As previously said, monopolistic competitive businesses run at capacity. Over time, they do not function at the minimal ATC. There are idle resources because the production capability is not being used to its fullest.
3. Monopolistic competing businesses squander money on marketing and advertising expenses in order to push their goods. These expenses can be used in production to cut expenses and perhaps lower the price of the final product.
4. Businesses do not run at full capacity, which results in unemployment and a depressed social climate.
5. As opposed to disappearing, which is connected with businesses operating in perfect competition, inefficient businesses persist under monopolistic competition.
6. The long-term difference between the marginal cost and the price represents another area of inefficiency for monopolistic competitive marketplaces.
7. Moreover, allocative inefficient monopolistic competitive market arrangements exist. Their costs exceed their marginal earnings.

Advantages of Monopolistic Competition

Monopolistic competition has the following benefits:

1. A few entrance hurdles
2. A bustling corporate environment
3. A wide range of diverse products and services offered to clients
4. Consumer education on goods and services in the market
5. Increased product quality

Disadvantages of Monopolistic Competition

Monopolistic competition has the following demerits:

1. Real-world businesses will always turn a profit if they have great brands and goods.
2. For their products to be regarded as near-equivalents, newly entering firms' products will not match those of the established companies and will take a long time to catch up.
3. High levels of brand loyalty and differentiation make new businesses more likely to encounter entrance hurdles.
4. Excessive resource waste
5. Improper resource allocation
6. Deceptive advertising
7. Insufficient capacity
8. Scarcity of standardized items
9. Restricted access to economies of scale due to a sizable number of businesses
10. Impossible to generate exceptional profits.

Examples of Monopolistic Competition

We'll now provide some instances to show that you can encounter this kind of market structure in everyday situations.

Fast foods: Burger King and McDonald's are excellent illustrations of the market model we study. They can't be replaced. However, they do sell comparable product kinds. This results from variations in flavor, form, packaging, etc. Customers make all the decisions on which companies to pick based on their personal likes and tastes.

Bakery Shops: Every town has an abundance of bakeries. Their goods vary in terms of look, flavor, and branding. On the other hand, a town's only bakery may be able to charge its customers more for its goods. If a bakery has a great reputation for its delicious pastries and a large customer base, it can afford to charge a higher price since its consumers are willing to pay a premium for superior quality.

Running Shoe Companies: It is said that there is fierce rivalry in the running shoe business. A few brands that consumers like to purchase products from include Adidas, Nike, New Balance, and Reebok. They contend with one another for devoted clientele. Even if the aforementioned businesses all manufacture trainers, the designs and characteristics of each brand make their goods distinct. For this reason, businesses can set their prices higher than those of their rivals.

Restaurants and Cafes: Every town has a great selection of eateries. A product that costs $70 may be purchased for $40 elsewhere despite its similarity. Numerous variables affect this, such as the location, the caliber, and other services.

Put simply, the surplus money that businesses spend on marketing and advertising rather than improving the quality of their products makes monopolistic competition seem wasteful. The fact that many businesses provide unique products and that entry hurdles are still present, albeit extremely low, makes this market model plausible. You may, therefore, notice several instances of these enterprises all around you.

Introduction to Monopoly

When a single vendor of a commodity offers a singular product, the market structure is known as a monopoly market. The seller in a monopoly has complete control over how much and how quickly their goods are sold.

Due to the high entry barriers, new companies sometimes find it difficult to break into monopolistic markets.

Key Points

1. A market that has just one vendor of a single, distinctive product is called a monopoly.
2. Perfect competition and monopolistic markets are not the same as monopoly market structures.
3. Being able to set prices allows monopolies to optimize their earnings.
4. Both short-term and long-term pricing and production determination are carried out.

Characteristics of a Monopoly Market

A monopoly market may have some of the following characteristics:

1. Price-makers are companies that operate under a monopoly. As a result, companies are able to set the price of their goods, which customers must often accept due to the scarcity of alternatives.
2. The entrance of new businesses is impeded by obstacles.
3. Price discrimination and a relentless pursuit of profit maximization are common features of a monopoly.
4. It's possible that the monopolistic company has a resource that no other company has.

Reasons Why Monopoly Marketplaces Occur

Due to the frequent attempts by rivals to enter and fight for market share, monopolistic markets are uncommon. Nonetheless, the following factors might lead to monopolies:

1. If resources or raw materials are required for the product to be manufactured, they belong solely to the vendor.
2. A vendor may be granted a monopoly in a certain market if the government forbids other businesses from entering it.
3. A newly established corporation may find its manufacturing costs prohibitively expensive. A new company may not be able to take advantage of economies of scale in the early years, but the current vendor, with a larger client base, may. It's possible that this will deter prospective sellers from joining the market.
4. It might be difficult for other firms to obtain the enormous amount of money needed by the corporation.
5. Technical and technological advantages (such as patents and proprietary technologies) that other companies would not easily obtain could belong to the seller.
6. The Life Insurance Company was established in India after the government approved the Life Insurance Corporation Act of 1956 and is a well-known example of a monopoly. Prior to the government's liberalization of the life insurance market in 1999, when private participants were permitted, LIC had a monopoly in the life insurance industry.
7. In a similar vein, the government-controlled the television industry until satellite and cable TV became widely used.

Monopoly Market and the Demand Curve

1. The demand curve for the monopolistic business slopes downward. This implies that if prices rise, demand decreases and vice versa. Due to the monopolist's exclusive position as the market's seller, the demand curve is also known as the average revenue (AR) curve.
2. Setting prices and production levels in monopolies. As the exclusive sellers of the goods, monopoly enterprises want to make as much money as possible. The demand, which may decline at greater prices, is beyond a company's control.
3. Both output and price cannot be set by a monopolist. They are forced to select one. They have the option of setting their own prices for their goods or letting the production that is sold be decided by the demand curve.
4. On the other hand, they might decide on the output and let market demand decide the price.

The setting of price and output varies across short- and long-term timeframes. The monopolist may experience three things in the near term:

• Exceptional earnings
• Typical earnings
• Losses

Advantages of Monopoly Market

Businesses that dominate a market and the clients they cater to can benefit from monopolies in a number of ways, both strategically and economically:

1. No battles over prices
   In other market models, prices are often variable and based on supply and demand for commodities because of healthy competition. A monopoly eliminates rivalry; thus, the company is spared from having to fight price wars with them. Consistent pricing is another expectation that customers have, which may help with client retention.
2. Large-scale Economies
   Due to their extensive infrastructure and ability to produce in huge numbers at low input costs, monopolies are often more efficient. The monopolistic corporation must conduct itself ethically for customers to benefit from this advantage.
3. Investigation and Creation
   Monopolies do ongoing research and development to produce new goods and services, which eventually help consumers. Businesses are encouraged to produce new technologies and information that benefit society by the exclusive use rights of patents and licenses. Pharmaceutical companies, for instance, would not be as inclined to spend money on costly medication development and research if they did not.
   Have exclusive patents and exclusive usage rights.

Disadvantages of Monopoly Market

Additionally, monopolies harm economies, consumers, and enterprises in a number of ways.

1. Substandard Goods and Services
   Because of the absence of competition, monopolies typically fail to recognize the need for improvement. Monopolies are prohibited from innovating or using inferior raw materials to boost profits if their product or service is a necessary component of society or public life. The market pushes individuals to buy these subpar items since there aren't any comparable alternatives.
2. Rising and Erratic Costs
   Because there are few or no competitors in their business, monopolies are able to set their prices without monitoring. They may thus unjustifiably charge exorbitant prices for their goods. Furthermore, monopolies may face inelastic demand and hike prices, giving consumers no alternative.
3. Disparities in Price
   One well-known characteristic of monopolistic enterprises is price discrimination. This occurs when they charge other consumers a different price for the same thing. Typically, they estimate the price of the goods based on what they think the buyer would be willing to pay. For instance, under a monopoly, the same product offered in a city is probably going to cost more than it does in a rural one.

Examples of Monopoly Market

When one seller controls the whole market and the flow of a certain good or service, there is a monopoly market. Here are a few illustrations:

1. De Beers Group: For a long time, diamond mining and trade have been closely associated with De Beers. It controlled most of the production and delivery of diamonds, giving it a near-monopoly over the world market for many years.
2. Microsoft: With its Windows operating system deployed on the great majority of personal computers globally, Microsoft enjoyed a near-monopoly in the operating systems industry in the 1990s.
3. Google: With more than 90% of the worldwide market, Google has a monopoly-like grip on online search. Its AdWords infrastructure allows it to dominate other services as well, such as internet advertising.
4. Intel: Intel commands a large portion of the x86 computer processor industry. With its processors powering most personal computers and servers globally, it commands a substantial market share.
5. Local Utilities: A single business often provides utilities like water, electricity, and natural gas in multiple locations, giving them a monopoly in their particular markets.
6. Patented Pharmaceuticals: Occasionally, pharmaceutical corporations own patents on life-saving pharmaceuticals, which grant them the only authority to manufacture and market such products for a set amount of time, therefore establishing a monopoly until the patent expires.

These illustrations show how monopolies may develop in a variety of sectors, frequently as a result of advantages over competitors in technology, control over necessary resources, or the availability of protective laws.

Difference between Monopoly and Monopolistic Competition

The difference between Monopoly and Monopolistic Competition are as follows:

Conclusion

In conclusion, monopoly and monopolistic competition both include businesses that have some degree of market power, but they vary in terms of the number of sellers, the degree of product differentiation, entry obstacles, and the intensity of market rivalry.

FAQs

Q1. What gives a monopoly its power?

A. The lack of competition allows monopolies to set prices and output levels to maximize profits.

Q2. How do monopolies arise?

A. A number of reasons, including laws, patents, the ownership of necessary resources, economies of scale, and entrance obstacles, can result in the formation of monopolies.

Q3. What benefits may a monopoly offer?

A. Economies of scale may help monopolies by lowering average costs and perhaps increasing profits. They could also spend money on research.

Q4. How do companies in monopolistic competition distinguish their goods?

A. Companies in monopolistic competition differentiate their products using marketing techniques such as branding, advertising, quality variations, and design.

Q5. How does product diversification affect monopolistic competition?

A. Product differentiation lets businesses set their own pricing to some extent and lessens direct rivalry with other businesses.