top of page

Question

Analyse how perfect competition differs from a monopoly.

Quick Answer:

Perfect competition is an ideal market structure that has many buyers and sellers, identical or homogeneous products, no barriers to entry. A monopoly is where a single firm controls the entire output of the industry.

Perfect competition differs from a monopoly in several ways :
In perfect competition, there are many sellers whereas in a monopoly there is only one
In perfect competition, there is a large number of buyers and sellers who have perfect knowledge of market conditions and the price that is charged. As its name suggests, a monopolist is the sole supplier of a product in a given market. This is due to high barriers to entry, which result in a lack of substitutes.

In perfect competition there are no barriers to entry and exit whereas in a in monopoly there are barriers
As there are literally no barriers to entry in perfect competition, there is freedom of entry to, and exit from, the market. . However a monopolist can remain so only if in the long run there are high barriers to entry. These obstacles effectively prevent other firms from entering the market. Examples include economies of scale of existing firms, Ownership of essential resources, the existence of intellectual property rights (namely, patents, trademarks and copyrights), advertising expenditure and legal barriers to entry.

Firms in perfect competition are price takers whereas a monopoly is a price maker
No individual firm has any influence on the market price in perfect competition. Firms are described as being price takers. The ruling price is determined by the forces of market demand and the output of all the firms. On the other hand, the monopolist has significant market power, controlling enough of the market supply that it can charge higher prices yet produce a lower output than would be the case if it faced real competition.

In perfect competition, all firms and consumers have complete information about products, prices and means of production. A monopolist is able to protect its prestigious position because customers and rivals have imperfect knowledge, partly as a result of the monopolist's ability to protect its trade secrets.

In perfect competition, products are perfect substitute whereas in a monopoly there are no close substitutes

In perfect competition, there is a low degree of market concentration in whereas in a monopoly it is 100%

bottom of page