Monopoly and Monopolistic competition describe market situations, which are quite distinct to each other in terms of the level of competition, level of market power, types of products sold, and pricing structure. Monopoly and Monopolistic competition are similar to each other in that a large number of buyers have only a few numbers of sellers who have better control over market dynamics. The article will clearly outline the dynamics of each market structure representing similarities and differences between the two.
What is Monopoly?
Monopoly is when a single company owns all or the majority of the market for a product or service sold. When a monopoly situation exists in the market, this means that there is one large seller who has the greatest market power, which results in very low levels of competition. Since competition is low, such large monopolistic market players are able to charge high prices and sell inferior products. An example would be public monopolies formed by governments for the provision of public goods such as water and electricity.
Another example of a market with monopoly would be a pharmaceuticals company which discovered a cure for a disease. This innovation will allow the firm to patent the drug so that it cannot be produced by another competitor during the period for which the patent lasts. This will give the pharmaceutical company a monopoly effect in the market.
What is Monopolistic Competition?
A monopolistic market is one where there are a large number of buyers but a very few number of sellers. The players in these types of markets sell goods which are different to each other and, therefore, are able to charge different prices depending on the value of the product that is offered to the market. In a monopolistic competition situation, since there are only a few number of sellers, one larger seller controls the market; therefore, has control over prices, quality, and product features. However, such a monopoly is said to last only within the short run, as such market power tends to disappear in the long run as new firms enter the market creating a need for cheaper products.
What is the difference between Monopolistic Competition and Monopoly?
Monopoly and Monopolistic competition are similar because each market structure has a large number of buyers and one or a very few number of sellers. However, monopolistic markets have few barriers to entry for new firms, whereas monopoly markets have high entry barriers because the market is controlled by one large company.
Monopoly markets are regulated by competitive commissions, to ensure that monopoly players do not fully control market dynamics.
Summary
Monopolistic Competition vs Monopoly
• Monopoly and Monopolistic competition describe market situations, which are quite distinct to each other in terms of the level of competition, level of market power, types of products sold, and pricing structure.
• When a monopoly situation exists in the market, this means that there is one large seller who has the greatest market power, which results in very low levels of competition.
• A monopolistic market is one where there are a large number of buyers but a very few number of sellers. The players in these types of markets sell goods which are different to each other; therefore, are able to charge different prices.
• Monopolistic markets have few barriers to entry for new firms, whereas monopoly markets have high entry barriers because the market is controlled by one large company.