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A Comparison of Two Market Structures

Kerri Gates-White

Belhaven University

Professor James Leggette

4 June 2016
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A Comparison of Two Market Structures

Two different types of market structures are competitive markets and monopolistic

markets. Moreover, there are two types of of competitive marketsperfect and imperfect. A

monopolistic market is an example of an imperfect competitive market. There are a few

similarities and many differences to these two types of market structures.

Perfect and Imperfect Competition

Perfect competition describes a market that is controlled completely by market forces.

In a perfectly competitive market, all firms sell identical products and services, firms cannot

control prevailing market prices, market share per firm in small, firms and customers have

perfect knowledge about the industry, and no barriers to entry or exit exist (DePersio, 2015). If

any of those conditions are not met, the competition is imperfect. In a perfectly competitive

market, there are multiple producers and consumers. However, product homogeneity is at the

core of a perfectly competitive market. Since each firm produces the same products, no single

firm can afford to charge more than other firms. Producers choose how much product they will

produce, but they do not set prices. Price and marginal cost are one in the same. There is zero

economic profit. An equilibrium is created because of economic efficiency. There is extensive

competition with no market control. Perfect competition, however, is an abstract concept.

Imperfect competition is very common. Examples of imperfect competition include oligopoly,

monopolistic competition, monopsony, and oligopoly (DePersio, 2015).

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Monopolistic Markets

A pure monopolistic market consists of a single firm that has total market control. This

firm determines pricing and supply levels for products and services. Since a monopolist has total

market control, it is very difficult for other firms to enter and/or exit the market. This type of

market uses barriers such as patents, licenses, and copyrights to control entry and exit of the

market. In the event that other firms are able to enter the market, those firms are still inferior to

the monopolistic firm. The monopolistic market also controls the market prices of goods and

services. Usually, the market is composed of a single seller. Therefore, buyers do not have the

advantage of comparison shopping. Prices are set above marginal cost, and firms earn a positive

economic profit. A monopoly is characterized by a lack of production competition and a lack of

substitute products. Monopolistic markets are inefficient due to the lack of competition and the

extensive market control. Sometimes, a monopoly has information that is unknown to others. In

comparison, a perfectly competitive market has information known to everyone involved. The

main concern of a monopoly is market share. The greater the monopoly power, the higher the

market share.

Both competitive markets and monopolistic markets incur the same costs. They also

share the same production functions. The goal of both types of market structures is to maximize

profits. However, a perfectly competitive firm is a price taker, and a monopoly is a price

maker. Monopolies charge higher prices for products or services, but the production output is

less than the output of a perfect competition. Though both market types are only guaranteed
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normal profit, a monopoly is capable of achieving economic profit, whereas a perfectly

competitive market is not. If either type of market moves away from the profit maximization

point (marginal revenue equals marginal cost), it will lose profit or increase costs.

Pure Monopoly Versus Monopolistic Competition

The student believes the difference between these two similarly named market structures

should be notated to avoid confusion between the two. Thus far, the monopolistic market

discussion describes pure monopoly. Monopolistic competition, on the other hand, has more

similarities to pure competition. There are many suppliers in the market, and the entrance into

the market is not as restricted as in a pure monopoly. A monopolistic competition is composed of

a variety of sellers who must differentiate their products from the products of the competition to

achieve price advantages. Monopolistic competition is only possible, however, when the

differentiation is significant or if the suppliers are able to convince consumers that they are

significant by using advertising or other methods that would convince consumers of a product's

superiority (Spaulding, 1982).

In conclusion, a perfectly competitive market does not allow firms to make decisions

regarding prices. If a firm raised the price of its products, that firm would lose business because

the other firms are selling the same products at a lower price. A monopoly, however, can change

and raise the prices at its own discretion. A monopoly means prices for goods or services are

higher than in a competitive market, because the goods or services are unique. Perfect
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competition has a higher output than a monopoly, because a monopoly has higher prices and a

single source of supply.

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References

AmosWEB is Economics: Encyclonomic WEB*pedia. (2016). Amosweb.com. Retrieved 2 June

2016, from http://www.amosweb.com/cgi-bin/awb_nav.pl?

s=wpd&c=dsp&k=monopoly+and+perfect+competition

DePersio, G. (2015). What is the difference between perfect and imperfect competition? |

Investopedia. Investopedia. Retrieved 2 June 2016, from

http://www.investopedia.com/ask/answers/032515/what-difference-between-perfect-and-

imperfect-competition.asp

Nickolas, S. (2015). What is the difference between a monopolistic market and perfect

competition? | Investopedia. Investopedia. Retrieved 2 June 2016, from

http://www.investopedia.com/ask/answers/040915/what-difference-between-

monopolistic-market-and-perfect-competition.asp

Spaulding, W. (1982). Market Models. Thismatter.com. Retrieved 2 June 2016, from

http://thismatter.com/economics/market-models.htm