In this article we will discuss about the similarities and dissimilarities between Monopoly and Monopolistic Competition
Similarities between Monopoly and Monopolistic Competition:
The following are the points of similarities between the two market situations:
(1) Both in monopoly and monopolistic competition, the point of equilibrium is at the equality of MC and MR and the MC curve cuts the MR curve from below.
(2) In both, the demand curve (AR) slopes downward to the right and the corresponding marginal revenue (MR) curve is below it.
(3) In both situations, the equilibrium point is below the price line (AR).
(4) In both, there is excess capacity. In other words, the demand curve (AR) is not tangent to long-run average costs (LAC) curve at its minimum point.
(5) In both market situations, the producer is a price-maker. He can raise or lower the price.
Dissimilarities between Monopoly and Monopolistic Competition:
There are, however, more dissimilarities than similarities in monopoly and monopolistic competition which are as under:
(1) There is only one producer of a product under monopoly while there are a number of producers under monopolistic competition.
(2) There is no difference between firm and industry under monopoly. The monopoly firm is the industry. On the contrary, there are many firms in monopolistic competition and industry is called a group.
(3) Only a single product is produced under monopoly and there is no product differentiation. Under monopolistic competition, every producer produces differentiated products. Products are similar but not identical. They are close substitutes rather than perfect substitutes. They differ from one another in design, colour, flavour, packing etc. As a result, there is product differentiation.
(4) There are no selling costs in monopoly because the monopolist has no competitor. However, when the monopoly firm is established, the monopolist may spend some money on advertisement to acquaint the consumers about his product. But he will spend on advertisement only once. On the other hand, due to large number of firms and existence of competition among them, expenditure on selling costs is essential under monopolistic competition.
(5) The monopolist can charge different prices from different customers for the same product and can adopt the policy of price discrimination. But price discrimination is not possible under monopolistic competition due to the presence of ‘competitive’ element in it.
(6) There being no close substitutes of the product under monopoly, the demand for his product is less elastic. Therefore, the demand curve of the monopolist is steep, i.e., less elastic. On the contrary, products are close substitutes under monopolistic competition. As a result, the demand for the products of every firm is more elastic and its demand curve is flat or more elastic.
(7) The inference can be drawn from the analysis that the monopoly price is higher than the price under monopolistic competition. Moreover, the monopolist has more freedom in fixing the price for his product than the monopolistic competition.
(8) Firms can enter and leave the ‘group’ under monopolistic competition in the long-run because the element of competition is present in this market situation. Since the monopolist has full control either over the price or the supply, no firm can enter the monopoly industry.
(9) There being no fear of entry of new firms in monopoly, the monopolist earns super-normal profits even in the long-run; whereas firms earn only normal profits in the long-run under monopolistic competition because the firms can enter and leave the ‘group’.