10.7 : Monopolistic vs Perfect Competition vs Monopoly

All three market structures have unique features and implications for how goods and services are produced and priced.

In perfect competition, there are many firms selling identical products, making them price takers. It is characterized by a high level of efficiency, as firms produce at the lowest possible cost (the minimum of the Average Total Cost curve). There are no barriers to entry or exit, ensuring that economic profits are zero in the long run. Firms produce at the point where price equals marginal cost and equals the minimum average total cost, thereby achieving both allocative and productive efficiency.

Monopolistic competition shares some characteristics with perfect competition, such as many firms and free entry and exit, but differs significantly as firms sell differentiated products. This differentiation gives firms some control over pricing. Firms produce at a level where Average Total Cost is not minimized, leading to excess capacity. In the long run, firms earn zero economic profits due to the entry of new competitors.

Monopoly stands apart as a market with a single firm dominating the entire market, facing no competition. They are price maker, setting prices above marginal costs to maximize profits, leading to reduced output and higher prices compared to more competitive markets. Barriers to entry prevent new firms from entering, allowing the monopolist to sustain economic profits in the long run. The monopolist produces where Marginal Revenue equals Marginal Cost but prices above this level, resulting in both allocative and productive inefficiency.