10 Major Difference Between Monopoly And Monopolistic Competition (With Chart)

SHARE

What Is Monopoly?

A monopoly is a market structure characterized by a single seller, producing and selling a unique product in the market. It is fair to say that such a firm constitutes the entire industry and there is no distinction between the firm and the industry. In a monopoly market structure, the seller faces no competition as he is the sole seller of goods with no close substitute.

In such a market structure, a monopolist or a single seller is the one who identifies gaps, excludes competition and controls the supply of a particular commodity. Such a monopolist can use his single-selling power in any manner to realize maximum revenue. This includes price discrimination. The consumers have to accept the price set by the firm/seller as there are no other sellers or close substitutes.

Factors such as legal barriers, ownership of resources, deliberate actions, technological superiority, economies of scale, copyright and patent, unavailability of substitutes and high starting cost make an entity a single seller of goods. All these factors restrict the entry of other sellers in the market.

Disadvantages of monopoly to consumers include:

  • Restricting output onto the market
  • Charging a higher price than in a more competitive market
  • Reducing consumer surplus and economic welfare
  • Restricting choice for consumers
  • Reducing consumer sovereignty.

Monopoly Curve

Characteristics Of Monopoly

  1. A monopoly is a market structure where a single seller produces or sells the product to large number of buyers.
  2. Under a monopoly, there are many buyers but only one seller.
  3. Under monopoly, there are stringent barriers on the entry of new firms.
  4. In a monopoly, there is assumption that the sellers and buyers have complete knowledge in regard to market activities.
  5. Under a monopoly, the revenue curves are less elastic. It means for a small increase in sales (demand), the monopolist has to reduce the price to a greater extend.
  6. Under a monopoly, the firm can enjoy supernormal, normal profits or can sustain losses, both in the short run and long run. 
  7. The output under monopoly is fixed by a sole seller.
  8. In a monopoly, there is no competition at all. No price or product competition.
  9. There is no difference between firm and industry in a monopoly because it is a single firm regulates the whole market.
  10. Product predictability is high in a monopoly market due to presence of only one seller in a monopoly market.

What Is Monopolistic Competition?

Monopolistic competition is a market structure which combines elements of monopoly and competitive markets. It characterizes an industry in which firms offer products or services that are similar but not perfect substitutes. Barriers to entry and exit in a monopolistic competitive industry are low and the decisions of any one firm do not directly affect those of its competitors. Each firm makes independent decisions about price and output based on its product, its market and its costs of production.

In a monopolistic competitive market, firms are faced with a downward sloping demand curve, because each firm makes a unique product, it can charge a higher or lower price than its rivals. The firm can set its own price and does not have to take it from the industry as a whole.

Firms operating under a monopolistic completion often engage in high voltage competition with other firms offering similar product or service and therefore there is always need to advertise to let customers understand how different they are from the other competitors.

Disadvantages Of Monopolistic Competition Include:

  • Some differentiation does not create utility but generates unnecessary waste such as excess packaging.
  • Advertising may also be wasteful because it is more informative rather than persuasive.
  • There is large number of firms and that means limited access to Economies of scale.

Monopolistically competitive firms are common in industries where differentiation is possible such as:

  • Restaurants
  • Hairdressers
  • Clothing
  • TV programs
  • Pubs and bars
  • Consumer services such as mechanical engineering
  • General specialist retailing

Monopolistic Competition Curve

Characteristics Of Monopolistic Competition

  1. In a monopolistic competition, there are a large number of independent sellers and each firm has a relatively small  market share hence no individual form has any significant power over price.
  2. Under monopolistic competition, there are close substitutes for the product, so there are many sellers of a product.
  3. Under monopolistic competition, new firms can enter into the market and same can exit the market. But this is only possible in the long run not in the short run.
  4. In a monopolistic competition, there is imperfect knowledge on the part of buyers and sellers.
  5. Under monopolistic competition, the revenue curves are more elastic. It means that small fall in price, will lead to big increase in demand.
  6. Firms in a monopolistic competition can enjoy normal, supernormal profits or sustain loses in the short run. However, in the long run, firms under monopolistic competition only enjoy normal profits.
  7. In a monopolistic competition, output varies with product differentiation and selling costs.
  8. Under a monopolistic competition, competition between competing monopolists is product differentiation and selling costs.
  9. In a monopolistic competition, there exist a clear distinction between firm and industry.
  10. Due to existence of many players in a monopolistic market, product predictability low.

Difference Between Monopoly And Monopolistic Competition In Tabular Form

BASIS OF COMPARISON MONOPOLY MONOPOLISTIC COMPETION
Description A monopoly is a market structure where a single seller produces or sells the product to large number of buyers.   In a monopolistic competition, there are a large number of independent sellers and each firm has a relatively small  market share hence no individual form has any significant power over price.  
Number Of Sellers There are many buyers but only one seller.   There are close substitutes for the product, so there are many sellers of a product.  
Market Entry There are stringent barriers on the entry of new firms.       New firms can enter into the market and same can exit the market. But this is only possible in the long run not in the short run.
Knowledge Of Market Activities There is assumption that the sellers and buyers have complete knowledge in regard to market activities.   There is imperfect knowledge on the part of buyers and sellers.
Revenue Curves The revenue curves are less elastic. It means for a small increase in sales (demand), the monopolist has to reduce the price to a greater extend. The revenue curves are more elastic. It means that small fall in price, will lead to big increase in demand.  
Normal Profits, Supernormal Profits & Losses The firm can enjoy supernormal, normal profits or can sustain losses, both in the short run and long run.  Firms in a monopolistic competition can enjoy normal, supernormal profits or sustain loses in the short run. However, in the long run, firms under monopolistic competition only enjoy normal profits.  
Output The output under monopoly is fixed by a sole seller.   Output varies with product differentiation and selling costs.
Competition & Product Differentiation There is no competition at all. No price or product competition.   Competition between competing monopolists is product differentiation and selling costs.  
Distinction Between Firm &Industry There is no difference between firm and industry in a monopoly because it is a single firm regulates the whole market.   There exist a clear distinction between firm and industry.  
Product Predictability Product predictability is high in a monopoly market due to presence of only one seller in a monopoly market.   Due to existence of many players in a monopolistic market, product predictability low.