Compare the features of monopoly and perfect competitive firms.
State that the perfect competition differs from the monopoly as there are perfect market information and mobility of resource in the perfect market competition while there are imperfect market information and immobility of resources. These two forms of market structures will differ in term of the structure, behaviours and performance
1. Explain how the types of market structure will differ in term of the structure or characteristics
In the PC market, there are many firms and these firms produce goods which are homogeneous while there is only one firm in the monopoly market. Firms in the PC market has ease of entry and exit while there are strong barriers to entry in the monopoly market
2. Explain how the types of market structure will differ in term of the behaviours of the firm
The firms in the PC market abide to the price set by the industry but it will determine the production level based on profit maximisation. As such, its MR and AR are perfectly-elastic as there is perfect information on the price level which will influence the value of AR and MR. As for the monopoly, the MR and AR are downward sloping, given the presence of market power which will allow the monopoly power to conduct price setting. As such, the presence of market power will create a price-inelastic demand which means that it can set price at a higher level.
Firms in the PC and monopoly markets can make subnormal profit, normal profit and supernormal profit in the short run but firms in the PC market will only make normal profit while the monopoly can make normal and supernormal profit in the long run. Both firms do not engage in price competition as there is perfect market information and homogeneous product while the monopoly does not need to set pricing as it has complete market power to control the market. However, the monopoly will conduct non-price competition such as the creation of barriers to entry to block contestable market while firms in the PC market need not conduct non-price competition as the product is homogeneous, ignoring the need for product differentiation.
The firms in the PC market will be able to attain production and allocative efficiency in the short run and long run due to perfect market information, enabling the firm to adjust production equilibrium to social equilibrium. However, it may not be able to reap dynamic efficiency and has very little capacity to reap economies of scale due to the small scale of production. On the other hand, the monopoly may not achieve allocative efficiency in the short run since the firm’s market equilibrium at profit-maximisation level, where MC=MR, is not equal to social equilibrium at social optimisation, where P=MC. Since the monopoly’s MR and AR are downward-sloping due to the presence of market power, the monopoly is unable to achieve production efficiency as it is producing at excess capacity in the short run when it produces at profit-maximising level. However, the monopoly will attain production efficiency in the long run, given that production level of the respective level is lowest. Nonetheless, the monopoly is able to have lower average cost, since it has greater capacity for economies of scale.
In conclusion, it can be observed that the characteristics of the imperfect market and perfect market structures and the size of the firm in the two types of market structure will have strong influence in the behaviours and performance of the firm in these markets.
This article is contributed by Mr. Simon Ng, founder and principal JC Economics Tutor of Economicsfocus, who has 20 years of teaching experience. Currently, Mr. Simon Ng provides specialized Economics Tuition and GP Tuition. To read more articles on Economics issues and skills development, please refer to the JC Economics Essays blog.