Perfect Competition versus Monopoly
Perfect Competition versus Monopoly Characteristics and differences of perfect competition and monopoly Introduction The essay starts with a brief introduction to market structures followed by pointing out the characteristics of Perfect Competition and Monopoly and the conditions for these market structures and the firms operating within these market structures. The essay proceeds on to discuss the differences between perfect competition and monopoly. The final section discusses the issues addressed in the article “Microsoft: Extending its tentacles” in light of the theories of perfect competition and monopoly, followed by a brief conclusion. Market structures – Perfect competition and monopoly Perfect competition and monopoly are examples of market structures. They are polar extremes which separate a spectrum of market structures known as imperfect competition. Figure 1 illustrates the main types of market structure, including monopolistic competition and oligopoly. ... Pure monopoly is exceedingly rare and perfect competition is actually non-existent—it is a theoretical abstraction or model, defined by the conditions stated in the following section. Characteristics of Perfect Competition and Monopoly Perfect Competition Although rarely possible, perfect competition, as a concept, provides a useful benchmark for evaluating performance in actual markets. Perfect competition exists when: 1. ... Monopoly At the other extreme of the market structure is monopoly. ... Conditions for monopoly are: 1. ... Main distinctions between perfect competition and monopoly The monopolist and the perfectly competitive firm operate at different extremes of the market; as such they face different market environments. ... Figure 2 compares the profit maximisation position for an industry under monopoly with that under perfect competition. Note that the comparison shown is between monopoly and the whole industry under perfect competition, this is possible because theoretically in a monopoly the firm is the industry. ... If the same industry were under perfect competition, however, it would produce at Q2 and P2 – a higher output at a lower price. ... This comes from the theory that the firm under perfect competition faces a perfectly elastic demand (AR – Average Revenue) curve – a horizontal demand line – which also equals MR. ... When all firms under perfect competition do this, price and quantity in the industry will be given by P2 and Q2 in figure 2. Barriers to entry In the long run, under perfect competition freedom of entry eliminates supernormal profit and forces firms to produce at the bottom of their LRAC (Long-run Average Cost) curve. ... Under monopoly, however, barriers to entry allow profits to remain supernormal in the long run.