The upcoming discussion will help you to make a comparison between perfect competition, monopoly and monopolistic competition.
1. Structural Differences:
Under perfect competition, there are innumerable numbers of firms who produce homogeneous goods. Each firm in the market is so small that it cannot exert any influence on price and output. Each firm, thus, behaves as a price- taker.
Under monopolistic corn-petition, there is quite a large number of sellers who sell slightly different products. Product differentiation enables a firm to exercise some power over price and output. This means that sellers behave as ‘price-makers’. However, a monopoly seller has full control over its price-output decision.
There is complete freedom of entry and exit of firms—both in perfect competition and in monopolistic competition. This condition is true during the long period only. In the short run, entry or exit is ruled out in both these market forms. But a monopoly business is characterized by the absence of a rival seller. Entry of new firms is legally prohibited in monopoly.
2. Behavioural Differences:
A firm behaves as a price-taker under perfect competition, and the demand curve faced by it is a horizontal one. Since price is fixed, AR curve coincides with the MR curve. A monopoly firm, however, faces a negatively sloped demand curve because it can have perceptible influence over price and output. Consequently, MR curve is also negative sloping and lies below the AR curve.
This is also true under monopolistic competition. The only difference between monopoly and monopolistic competition is that the demand curve faced by a monopolistically competitive seller is relatively more elastic.
Since price is fixed to a competitive firm, it has only to undertake output decisions. Further, products sold by competitive firms are perfect substitutes. Because of complete product homogeneity, no firm finds any incentive to spend money on any kind of sales promotional activity.
A monopoly firm also does not find any urgency to spend money on advertisement since there is no rival seller. But a monopolistically competitive seller has to incur some sort of “selling costs” just to provide information about its product or rivals’ products. In fact, in order to attract more and more customers in its pocket, additional expenditure on selling cost is a necessity.
In every market, sellers adopt independent price-output policy. But all sellers of all market forms follow a basic principle. The basic behavioural rule is thee quality between MC and MR. Under perfect competition, since AR = MR, MC = MR = AR = P. But, in monopoly and in monopolistic competition, this behavioural rule is slightly altered to MC = MR < AR = P, since in these two markets, AR > MR.
A monopoly firm or a monopolistically competitive firm produces in that region of its demand curve where the coefficient of elasticity of demand is greater than one. But, under perfect competition, coefficient of elasticity of demand is infinite.
3. Optimum Capacity and Sub-Optimal Capacity of Production:
A competitive firm always produces at the minimum point of its AC curve. This means that a firm utilizes its plant optimally. Since AR curve is a horizontal one, a competitive firm will always produce at the lowest point of its AC curve. It is then said that perfect competition leads to optimum economic efficiency.
But, under monopoly, or under monopolistic competition, the demand curve is negative sloping. It is due to the nature of this demand curve that a firm fails to operate at the minimum point of its AC curve. It operates somewhere to the left of the lowest point of the AC curve.
The implication of this is that resources are not utilized optimally. Imperfect competition leads to economic inefficiency. As a result, a higher price for the product is charged and a lower output is produced. In this sense, perfect competition is an ideal market where social welfare gets maximized. But social welfare gets reduced in monopoly or in monopolistic competition.
4. Supply Curve:
Under perfect competition, MC curve above the shut-down point is the short run supply curve. But, under monopoly, or monopolistic competition, the supply curve remains indeterminate. In other words, in these market forms, MC curve is not the supply curve.