Difference between Monopoly and Perfect Competition
Number of Buyers and Sellers
In the context of a perfectly competitive market, it is observed that the quantity of both buyers and sellers is quite substantial. They engage in ideal competition.
The determination of prices within an industry is influenced by the interplay between the forces of demand and supply. All companies are required to sell their products at a certain price.
It is not within the capacity of any individual corporation to exert influence over prices by a singular action. The entity must be willing to accept the price determined by the industry and align its production accordingly.
Therefore, it may be concluded that each enterprise operates as a price-taker and adjusts its quantity accordingly. At any given moment, there exists a singular price for a particular product within the market.
Conversely, in the context of a monopoly, the differentiation between a corporation and an industry becomes indistinguishable as a sole entity exclusively offers a specific item or service. The company operates within a monopolistic industry, wherein it possesses the authority to determine and establish the price of its product. Hence, it is referred to as a price-maker.
Average Revenue Curve
The demand curve, also known as the average revenue curve (AR), exhibits a characteristic of being a horizontal straight line that runs parallel to the x-axis. Put simply, the firm’s average revenue curve (AR) is completely elastic, meaning that any change in price will result in an equal change in quantity demanded.
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Consequently, the marginal revenue aligns precisely with the average revenue curve. In contrast, it is observed that the average revenue curve of a monopolistic business exhibits a negative slope from left to right, with the marginal revenue curve positioned below it.
Difference between Price and Marginal Cost
Although there are certain similarities in the equilibrium conditions of perfectly competitive companies and monopolistic organizations, it is important to note that there exist dissimilarities in the linkages between price and marginal cost. In a state of perfect competition, the condition of equilibrium is met when the marginal cost is equal to the marginal revenue.
At this point, the price also aligns with these values since the marginal revenue and average revenue are coincident and form a linear curve that runs parallel to the X-axis. In essence, in the context of perfect competition, the condition where marginal cost (MC) equals marginal revenue (MR) implies that the price (also known as average revenue, AR) is equal to MR.
In the context of monopoly, it can be observed that the average revenue curve has a negative slope towards the left. Consequently, the marginal revenue curve is positioned below the average revenue curve. In the context of equilibrium, it is seen that marginal cost and marginal revenue reach a state of equality.
At this point, it is noteworthy that the price, also known as average revenue, exceeds the marginal cost. In other words, the relationship can be expressed as MC = MR < Price (AR).
Differences in the Shape of the Marginal Cost Curve
Another significant distinction between perfect competition and monopoly is in the behavior of the marginal cost curve at the equilibrium point. In perfect competition, the marginal cost curve of a firm must exhibit a rising trend, whereas in monopoly, it has the potential to display a rising, declining, or constant pattern.
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Under conditions of perfect competition, it is only feasible when the marginal cost curve slopes upward from left to right, as the marginal revenue curve is horizontal to the X-axis. The equilibrium position is depicted in Figure 4.23, illustrating the state of equilibrium for the company at point E. The company generates revenues for its PEFG division through the sale of its OQ output at the OP price.
However, in a monopoly market structure, a firm has the potential to achieve equilibrium with a marginal cost curve that is either growing, declining, or constant. It is crucial, however, that the marginal cost curve intersects the marginal revenue curve from a position below. The reason for this phenomenon is that the marginal revenue curve exhibits a negative slope when a monopoly is present, with a downward trajectory from the left to the right.
illustrates the three equilibrium scenarios. the equilibrium of a monopolistic market is depicted in the context of increasing costs. Specifically, the rising marginal cost (MC) curve intersects the marginal revenue (MR) curve from a lower position at point E.
illustrates a situation where a downward sloping marginal cost (MC) curve intersects the marginal revenue (MR) curve from a lower position at point E. Similarly, in Figure 4.24 (C), a horizontal MC curve, which is equal to the average cost (AC) curve, intersects the MR curve from below at point A. The price of QP is decided in each of the three conditions at which the output of OQ is sold. However, there are variations in both output and earnings across different situations.
Differences between Perfect Competition and Monopoly with Regard to Profits
One notable distinction between perfect competition and monopoly is in the long-run profitability of competitive firms. Specifically, competitive firms are observed to solely generate normal profits over extended periods.
In the short-run, a competitive firm has the potential to generate earnings that exceed the level of regular profits. However, sustaining this situation in the long term is unlikely due to the phenomenon of new enterprises being enticed by the prospect of anomalous profits and subsequently entering the industry, leading to the eventual disappearance of these profits.
In contrast, in situations when a monopolistic firm is experiencing short-run losses, it will consistently generate supernormal profits in the long term due to the absence of new competitors being able to enter the industry. In Figure 4.24(B), it can be observed that the monopoly firm generates supernormal profits denoted as PABC.
Difference between the Two Market Situations with Regard to their Size
Another notable distinction between the two market scenarios pertains to their respective sizes. In the context of long-run competitive equilibrium, the price is equivalent to both the long-run marginal cost (LMC) and the minimal long-run average cost (LAC), specifically expressed as Price = LMC = LAC at its minimum value.
This suggests that in the long term, competitive enterprises achieve optimal size and operate at maximum production capacity. The monopolistic firm’s size is suboptimal due to the fact that although the equilibrium point occurs when long-run marginal cost equals marginal income, the long-run average cost curve is not minimized at this level.
The competitive equilibrium position is illustrated by the intersection of the long-run marginal cost (LMC), marginal revenue (MR), average revenue (AR), and long-run average cost (LAC) curves at the point E, which represents the minimum point of the LAC curve. The company is operating at its optimal size.
The shown scenario illustrates the state of equilibrium for a monopoly corporation, specifically denoted as point E. However, it should be noted that the price of the product in question, denoted as OP, does not align with the minimum long-run average cost.
The minimal point M on the Long-Run Average Cost (LAC) curve is located to the right of the equilibrium point E. This suggests that the monopolistic business exhibits surplus production capability between points E and M, and does not operate at maximum capacity.
Difference of Price Discrimination in the Two Market Situations
Additionally, a notable distinction exists in terms of price discrimination between the two market scenarios. The monopolist possesses the ability to implement varying prices for a given commodity across clients due to two primary factors.
Firstly, the absence of competitors allows the monopolist to exert control over the market, enabling the manipulation of prices. Secondly, the monopolist may discern that the elasticity of demand for their product varies across different markets, hence justifying the implementation of distinct pricing strategies.
Due to the perfect elasticity of the demand curve for his product, it is not feasible for any competitive manufacturer to engage in price discrimination. In the event that he attempts to impose an elevated price on select clients, such customers will only procure the product under conditions of monopoly.
Difference between the Two Market Situations with Regard to Price and Output
An other noteworthy distinction between perfect competition and monopoly is in the pricing and output levels. In the case of monopoly, prices tend to be higher while output levels are comparatively lower when compared to perfect competition.
In order to establish this, we make the assumption that expenses are uniform and unchanging inside both a dominant firm and a competitive industry. The demand curve of a competitive industry can be represented by AR, whereas its supply curve can be represented by AC (= MC). Both the buyers and sellers are in a state of equilibrium at point P, where the amount of the product OQ is bought and sold at the price QP (which is equal to OA) under conditions of perfect competition.
The diagram illustrates the state of equilibrium for a monopoly firm, denoted by point E. At this point, the marginal cost (MC) curve intersects the marginal revenue (MR) curve from below. The resulting monopoly price, Q1P1 (also represented as OB), is established, indicating the quantity of output, OQ1, that is sold.
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The diagram illustrates that the price under a monopoly denoted as Q1P1, is greater than the price under perfect competition, denoted as QP. Additionally, the quantity produced by a monopoly, represented as OQ1, is lower than the quantity produced under perfect competition, denoted as OQ. It is important to observe that the level of output in a monopolistic market is precisely half of the level of output in a competitive market.
The output level of a monopoly might vary in relation to the output level of a competitive market, depending on the specific demand and cost factors. However, it is important to note that the price under a monopolistic market structure will consistently exceed the price observed in a competitive market.
Difference between the Two Market Situations with Regard to Price and Consumer’s Welfare
One notable distinction between perfect competition and monopoly is in the impact on consumer surplus, since the higher price set by monopolies results in a reduction of customer welfare.
Assuming a price of QP (equivalent to OA), the consumer’s surplus can be represented by the geometric area BP1 PA. Under a monopoly, when the price increases from QP to Q1p1, the monopolist generates a profit equal to the area BP1 EA.
The limitation on consumer purchases to a quantity of OQ1 results in a decrease in consumer surplus, represented by the net loss of P1PE. The monopolist extracts a portion of the consumer’s surplus, specifically the BP1 PA area, as profit. The unavailability of the product in QQ1 quantity results in a net loss in customer welfare, referred to as P1 PE.