Differences between monopoly and monopolistic market competition.

DIFFERENCES BETWEEN MONOPOLISTIC COMPETITON AND MONOPOLY MARKET STRUCTURE

Monopolistic competition and monopoly are two market structures existing on rather two extremities of the market structure analysis. In this essay I will give their definitions, discussing their characteristics, giving their differences and concluding with an overview of what I have been able to achieve.

Amos WEB (2000-2010) defines Monopolistic competition as a market structure in which a large number of firms manufacture and produce not necessarily the same product but similar products but still maintain a substantial amount of profit. For example, the manufacturing of pens, firms manufacturing these can be said to exist in a monopolistic competition market where four or more firms manufacture the same product or similar products in this case pens. There is freedom of entry and exit and extensive knowledge of prices and technology.

The diagram above represents monopoly competition.

It has four characteristics, which are:

Large number of small firms: This market contains large numbers of comparatively small firms when compared to the size of the market. This gives for high rate of competition and little control over price or quantity.
Extensive but not perfect knowledge: in this competition buyers are not open to everything, they have relative information about alternative prices and complete information about product differences.
Similar but not identical products: the goods sold by firms in this market system are close substitutes but not perfectly identical. These goods satisfy the same basic wants and needs and can have subtle or noticed differences.
Imperfect resource mobility: firms in this market system are not hindered by government rules and regulations, there is freedom of entry and exist and there are few barriers to entry.

On the other hand, monopolistic market is defined by Yogesh Ambekar (2000-2009 at buzzle.com) as a situation whereby one firm produces a particular service generally without any close substitutes or similar products, and the firm makes maximum profit in an industry. An example of this is the Microsoft Company owned by Mr. Bill Gates, in this case he has taken advantage of this market completely.

The diagram above represents the monopolistic competition market.

It’s characteristics are in direct contrast with that of monopolistic competition, they are:

Single firm possessing sole ownership ...

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The diagram above represents the monopolistic competition market.

It’s characteristics are in direct contrast with that of monopolistic competition, they are:

Single firm possessing sole ownership of a product: there is only one existing firm selling only one product with no substitutes.
Restrictions of entry into and exit out of this industry: entry and exit into and out of this market is restricted by either legal or natural causes.
One unique product: the product being produced is unique and has no close substitutes or competition.
Information is not easily accessible: this is not available to other prospective producers as product is unique and there are barriers to entry and exit.

This two market systems are very different and there differences are:

There exists only one producer of a unique product in monopoly while in monopolistic competition there can be hundreds of producers producing the same or closely similar products or services. In monopoly one particular firm makes 100% of the markets profit while profit has to be shared among many firms in monopolistic competition.
In the short run, firms in a monopolistic competition market can behave like monopolized firms, but in the long run other firms are introduced into the market and it becomes similar to perfect competition but does not shut down or loose profit completely as it maintains spare capacity.
Firms in monopoly posses market power, i.e. the ability to increase price of the product without loosing buyers to another supplier or producer of the same product. This is because firms in monopolized market are the main suppliers or producers of such goods or services and there are no close substitutes for such products therefore leaving consumers with no choice, but in a monopolistic market, market power is not possessed by any firm as this will make them loose profit and buyers to a producer of the similar product.
In monopolistic competition there is little or no product differentiation and products are almost homogenous, but in monopoly product differentiation is very high due to the fact that there is no available substitute for product being produced.
The numbers of buyers and sellers differ greatly in that monopoly has only one seller of a product while monopolistic competition has more than four buyers and sellers.
In monopolistic competition market there are little or no barriers to entry. Barriers to entry are laws or restrictions put in place either legally or naturally to avoid competition from other firms. In monopoly barriers to entry are greatly present in order for a firm being the main producer of a product to continue that way.
In the short run, firms in monopolistic market can make excess profit but this reduces as the excess profit attracts other firms and is finally reduced to its barest minimum. While a monopoly firm can preserve excess profit for a long time as barriers to entry prevent other firms from entering into the industry.

The diagram above represents monopolistic competition in the short run and long run.

A monopoly firm would have a relatively inelastic demand curve, while a monopolistic competition firm would have a perfectly elastic demand curve.
In monopoly there is no pricing pressure from other competitive firms unlike the monopolistic competition that faces pricing pressure due to the numerous numbers of firms in this market structure. Pricing pressure is if the price of a good should affect another negatively or positively.

In conclusion, there exist a lot of differences between monopolistic competition and monopoly, although this firms have similarities, their differences are said to outweigh them. In this essay I have discussed and defined the meanings of monopoly and monopolistic competition and diagrams that help us understand this market structures, given its characteristics and also its differences.

REFERENCES

Amos WEB (2000-2010) Monopolistic competition. Retrieved 5th of may 2010 at

Amos WEB (200-2010) Monopoly. Retrieved 5th of May 2010 at

Yogesh Ambekar (2009) what does market monopoly mean? Retrieved 5th of May 2010 at

Wikipedia (2009-2010) Monopoly and monopolistic market. Retrieved 5th of May 2010 at