Comparison of Monopolistic

Competition with other Market

Structures
Unit 7 - Lesson 10
Learning outcome:
● Compare and contrast, using diagrams, monopolistic competition with
perfect competition and monopolistic competition with monopoly.
Monopolistic Competition and Perfect Competition
Similarities:

● Number of Firms
○ Perfect and Monopolistic Competition have a large number of firms.
● No or Little Barriers to Entry
○ In both markets there are no or very few barriers to entry
● Normal Profit in the Long-run
○ Firms in both Market structures make normal (zero)economic profit in
the long-run due to limited or no barriers to entry
● Abnormal, Normal Profit and Economic Loss in the Short-run
○ Firms in both Market structures have the ability to make abnormal,
normal profit and economic loss in the short-run
Monopolistic Competition and Perfect Competition
Differences:

● Market Power and the Demand Curve

○ Perfectly Competitive firms have no market power. They must accept the price the market
sets therefore the demand curve for these firms is perfectly elastic.
○ Monopolistically Competitive firms have some degree of market power hence the
downward sloping demand curve.
● Productive and Allocative Efficiency
○ Perfectly Competitive firms are productively efficient (P = Min ATC) and Allocatively
Efficient (P = MC) in the long-run.
○ Monopolistically Competitive firms are neither productively efficient nor Allocatively Efficient.
● Excess Capacity
○ Perfectly Competitive firms produce where the level of output is at minimum ATC making
efficient use of its resources therefore there is no excess capacity.
○ Monopolistically Competitive firms produce a lower level of output than where ATC is at a
minimum therefore there exists excess capacity.
Monopolistic Competition and Perfect Competition

Differences:
● Product Variety
○ Perfectly Competitive firms produce homogenous/undifferentiated
products.
○ Monopolistically Competitive firms go to extensive lengths to
differentiate their products.
● Economies of Scale
○ Perfectly Competitive firms cannot achieve economies of scale due to
their small size.
○ Monopolistically Competitive firms though tend to be relatively small in
nature do have some degree of achieving economies of scale.
Monopolistic Competition and Monopoly
● Number of Producers
○ Monopolistic Competition has a large number of firms in the market.
○ Monopolistic markets have a single or dominant firm in the market.
● Barriers to Entry
○ Monopolistic Competitive Markets have no barriers to entry.
○ Monopolistic Markets have very high barriers to entry.
● Normal and Economic Profits
○ Monopolistic Competitive Markets make normal profits in the long-run
○ Monopolistic Markets can make normal and abnormal profits in the long-run
● Competition and Prices
○ Free entry into the market drive profits down in the long-run leading to lower
prices for the consumer.
○ Monopolistic firms who have high barriers to entry allow the firm to make
profits in the long-run keeping prices higher for consumers.
Monopolistic Competition and Monopoly
● Market Power
○ Both the Monopolistic Competitive and Monopolistic firms have Market
Power and face a downward sloping demand curve.
○ However, the Monopolist has more Market Power due to the number of
firms in the market, barriers to entry and no close substitutes.
○ Monopolistic Competitive firms have less market power due to no
barriers to entry into the market and substitutes therefore have less
market power.
● Allocative and Productive Efficiency
○ Both Monopoly and Monopolistic Competition are neither Allocatively
(Price is greater than Marginal Cost) or Productively Efficient (Price is
greater than Average Total Cost).
Monopolistic Competition and Monopoly
● Research and Development
○ Monopolies ability to make abnormal profits over the long-run put them
in a better position to pursue Research and Development (R&D).
○ Monopolistically Competitive firms may pursue Research and
Development in order to try and differentiate/improve their products, but
they are more limited due to only making normal profit in the long-run.
● Economies of Scale
○ Some economies of scale can be achieved under Monopolistic
Competition but is limited due to the free entry into the market.
○ Monopolies have much greater ability to achieve economies of scale
since there is only one or a dominant firm in the market.