Question

Given that you are a vice-president of a corporation and you will need to explain to your board, when asked, how would you explain the major features of monopolistic competition compared to pure competition and pure monopoly?

Answer 1

Pure Competition vs. Monopolistic Competition

1) Price Determination: Under the pure competition, the forces of demand and supply determine the prices of items and services. Conversely under monopolistic competition prices of items and services will be determined by the owners in that market and each firm will be selling the items at its prices

2) Product Standardization: In the pure competition, the product sold are homogeneous by different firms however under monopolistic competition the firm will be selling the near substitute items

3) Entry and exit: There would be no barriers in pure competition but few barriers are on entry as well as exit of monopolistic competition.

4) Situation: The pure competition is an unrealistic assumption, and on the other hand the monopolistic competition is a realistic assumption

5) Average Revenue and Marginal Revenue: In the pure competition average revenue (AR) and marginal revenue (MR) would be equal; and under monopolistic competition the average revenue (AR) exceeds its marginal revenue (MR)

6) Slope of the demand curve: The slope of the demand curve in pure competition is horizontal, which indicates perfect elastic demand. The slope of the demand curve in a monopolistic indicates a downward trajectory, which indicates an elastic demand

7) Selling cost: The identical items are produced and are sold at uniform prices in pure competition, thus there is no necessity to incur selling costs. On contrast all the firms under monopolistic competition produce differentiated items and firms have to bear the huge expenses on selling costs.

Pure Monopoly vs. Monopolistic Competition

Number of seller: Under monopoly there is only a single seller that has complete control on the price and output of the an item while there are large number of buyers and sellers under the monopolistic competition

No Close Substitutes: In monopoly there are no substitutes to that commodity while in monopolistic competition there are close substitutes.

Barriers to entry: In monopoly there are high barriers to entry while in monopolistic competition there are low barriers.

Price of product: In monopoly the buyer is price taker however in monopolistic competition there are small controlling power on prices of products