Sometimes you ask, how can I differentiate perfect competition vs monopolistic competition? There are many areas in which these two types of market structures differ. If you are a customer or a seller in each of these markets, this guide clarifies how the two are distinct.
Perfect Competition Vs Monopolistic Competition Differences
1. Demand curve
The demand curve of an individual’s seller in a perfect competition market structure is horizontal. This signifies they have no power to dictate the market price of goods or services since they are just price takers, any attempt to increase prices results in losing customers to other sellers.
The inability to increase prices even when they are willing brings along many benefits to customers and market efficiency. For example, a perfect competition market structure does not struggle with overproduction, lost consumer surplus, and other inefficiencies related to the power pricing of sellers.
In contrast, the demand curve for players in monopolistic competition slopes downward. This gives them a competitive edge compared to sellers in perfect competition. The sloping demand curve enables players in this market structure to increase the prices of their products or services without risking losing all customers.
Market inefficiencies are unavoidable in such a market structure where sellers are willing and able to increase prices and not lose their customers. This explains why monopolistic market structures suffer from lost consumer surplus, deadweight losses, and even inefficiencies leading to excessive production.
2. Pricing power
Sellers in perfect competition have no pricing power. They are just but price takers of the equilibrium price set by forces of demand and supply in the market. None can dictate how the market should price certain of their homogenous products or services.
For instance, egg sellers cannot dictate how much each egg should be priced in the market. There are many of these egg sellers, and any attempt to increase your price would result in losing customers to the egg seller next door.
On the other hand, sellers in monopolistic competition have some level of pricing control. They are not price takers. They have room to modify their product and services and charge a different price from what prevails in the market.
Competition is quite stiff in perfect competition. Each seller has to charge the best price (lowest if possible) and offer the highest quality where they can. Sellers in this market structure have low room to improve the quality of their products or services. This is why they will often charge the same for their products because actual value addition is not readily possible.
Take, for instance, a wheat seller. A wheat seller cannot do much to improve the value of their wheat. Maybe they can enhance the safe storage of their wheat, but the actual value with which the wheat was harvested is beyond their control.
In contrast, sellers in monopolistic competition do not face stiff competition. Even though their products are similar, they are not perfect substitutes for each other. At least each seller in this market structure can still sell at a higher price citing improved differences that their products or services have.
4. Product differentiation
Product differentiation is not an option for sellers in perfect competition. Their goods or services are similar in many ways, and there is little each can do to make their goods or services stand out.
Let us use an example of the groceries market. Kale sellers have little they can do to make their kale’ stand out and attract many buyers.
However, product differentiation is a thing in a monopolistic market structure. Sellers in this market structure do tweak a thing or two to make their products stand out. This is how they can increase brand loyalty, brand equity, and sales in the long run.
Even though there might be some similarities between perfect competition vs monopolistic competition, these differences are much more pronounced. These differences make you understand why a commodity is priced a certain way dependent on the market structure where it is sold.