Perfect competition is one of the four main market structures. One of the characteristics of a perfectly competitive industry is that there are large number of buyers and sellers in the market. This large number of buyers and sellers explains why the industry is so competitive. Another characteristic of perfectly competitive industry is that all the sellers sell homogenous products and/or services which are perfect substitutes of each other. This is why sellers cannot achieve differentiation in a perfectly competitive industry. The buyers and sellers also have access to all the information. Perfectly competitive industry is also easy to enter or exit due to lack of artificial or natural barriers. The sellers in the perfectly competitive industry have no control over prices, thus, they could be called price takers. They can sell all they want at a given price but nothing at a higher price due to the presence of perfect substitutes . Perfect competition is also characterized by free movement of resources. The most commonly given example for perfectly competitive industry is agriculture .
In the short term, firms in perfectly competitive industry may be able to make super-normal profits but these super-normal profits will disappear in the long run due to the entry of new players. In other words, firms in a perfectly competitive industry only make normal profits in the long run . The profit maximization condition for firms in perfectly competitive industry is marginal cost (MC) = marginal revenue (MR). When MR is greater than MC, firms in perfectly competitive industry continue to increase scale of production until MR is equal to MC because doing so helps increase profitability. But if MR is less than MC, firms in perfectly competitive industry lower their scale of production in order to enhance their profitability until MR equals MC .
The monopoly market structure is defined by a single seller. In addition, there are no close substitutes for the product or service offered by the monopoly firm. Monopoly market structure is also characterized by the presence of barriers to entry which may be natural or artificial in nature. Natural barriers to entry may include scale of operation needed to achieve economies of scale and access to scarce resources and artificial barriers may include government legislation that protect the monopoly firm and advertizing/brand power which discourage the entry of new players.
There are several examples of monopoly firms. One example may be Microsoft which for decades had near-monopoly in the market for operating system. There were several reasons why Microsoft succeeded in achieving monopoly status in the market for operating systems. The first reason was its economies of scale since every PC manufacturer with the exception of Apple and few others installed Windows operating system on its product before shipping it to the customer. Another barrier was user habit. Most users were used to Windows user face and had been using it since their early computing days. There was also a barrier due to the resources required to unseat Microsoft and moreover, Microsoft had vast resources and was not afraid to aggressively defend its territory.
A monopoly firm has control over both quantity produced and price. In other words, a monopoly firm is a price maker. The profit maximization rule of MC=MR also applies to a monopoly firm, just as it applies to firms in perfect competition. But since monopoly firm is shielded from the competition faced by firms in perfectly competitive market, the prices charged by a monopoly firm are higher than they would be in a perfectly competitive industry. This is also the reason monopoly firms are able to earn economic profits that are above the normal profits in the perfectly competitive industry.
As far as advertising is concerned, it doesn’t exist in perfectly competitive industry for several reasons. First of all, the buyers already have all the knowledge and information they need. Similarly, producers are able to sell all they want at the price given by the market. Since goods are identical to each other and branding has no place in perfectly competitive industry, the lack of need for differentiation kills the purpose for advertising.
It may not make sense to some people for a monopoly firm to engage in advertising because it has no competition but having no competition doesn’t eradicate the possible emergence of a competitor in the future. This is why a monopoly firm engages in advertizing in order to increase brand loyalty and deter potential competitors from entering the market. Advertising enhances brand value and, thus, increases the cost of entry into the industry.
Perfect competition and monopoly market structures are almost polar opposite of each other. While perfect competition is characterized by a large number of sellers, monopoly has just one. Firms in perfect competition are price takers while a monopoly firm is price maker. Firms in both perfect competition and monopoly market structure follow the rule of MC=MR to maximize profits but firms in perfect competition earn normal profits while a monopoly firm earns above normal profits in the long run.
- College of Agriculture, Food Systems, and Natural Resources, North Dakota State University. (n.d.). Characteristics of Competition. Retrieved May 31, 2014. Web.
- Economics Online. (n.d.). Perfect competition. Retrieved May 31, 2014. Web.
- Krugman, P., & Wells, R. (2012). Microeconomics (2 ed.). New York, NY: Worth Publishers. Print.