Question

Compare and contrast two firms within the industry that display the economic concepts of a monopoly and perfect competition. Report actual profitability and financial performance of the firms.

Answer 1

While comparing a firm under monopoly market and under a perfectly competitive market one can see extreme contrast between the two but some resemblance also.

Under monopoly the entire market of a product is controlled by a single seller or firm. But under perfect competition there is large number of individual sellers.

Since the monopolist is a single firm, it enjoys the full marker control and therefore the single firm can fix any price for the product. Thus the monopoly firm is a price maker. In contrast to the monopoly the perfect competition is characterized by the large number of firms, one firm cannot alter the market condition buy its own action. Thus a perfect competitive firm is a price taker.

The product supplied by the two market firms is different. A monopoly firm may supply a homogenous or differentiated product. But a perfectly competitive firm is limited to homogenous product.

The monopolistic firm discriminates the price between the customers. A uniform price system does not exist in a monopoly market. But a perfectly competitive firm charges uniform price. The firm is unable to charge different price from the customer since there is perfect knowledge about the market.

Free entry is not allowed to a firm under monopoly. The entry is prohibited either by legal, technological or by market forces. The perfect competitive firm can easily enter into the market. There are no barriers to the entry into the market.

The monopoly firm characterized by imperfect knowledge of market condition. In a perfect competition firm is endowed with full knowledge about the market condition.

Regarding the mobility of factors the two extreme firms differ. The monopoly firm is experiencing imperfect mobility of factors where as a perfect competitive firm enjoy perfect mobility to factors.

A monopoly firm’s demand curve is relatively less elastic. If the firm wants to sell more it has to reduce the price. It can charge a high price only by reducing its sales. The demand curve facing by a monopoly firm is a downward sloping demand curve. The demand curve of a perfectly competitor is perfectly elastic. The firm cannot alter the sales by changing its price.

The two firms can be distinguished on the basis of the slope of their demand curve. The demand curve of the monopoly firm slopes downward and AR ˃MR. The slope of the demand curve of a perfectly competitive firm is a horizontal line where AR=MR. The marginal revenue coincide with average revenue.

The monopoly firm is having full control over the price. But a competitive firm is having no control over the price.

The longrun profit of the monopoly firm is AR˃AC. Thus the firm earns super normal profit both in shortrun and longrun. The competitive firm may earn extra profit in shortrun depending on the market price. But in longrun the firm earns only normal profit.

Regarding the economic efficient the monopoly firm is inefficient. Contrast to it the efficiency performance is awesome by a competitive firm.

A monopoly firm provides a little consumer sovereignty and less consumer surplus and cause deadweight loss to the entire society. A competitive firm maximized consumer sovereignty and surplus and cause no deadweight loss unless controlled by the government.

The resemblance between the two firms in two market condition is that both the firms do not incur selling cost.

The two firm fix the output at which MC=MR.