Perfect Competition and Monopoly Essay Example | Topics and Well Written Essays - 1250 words

Perfect Competition and Monopoly - Essay Example These structures leave one benefitted and other worsen off. Economist offer infer that perfect competition is the right way to progress in the long run as it bring efficiency in the market however; detailed discussion and comparison is essential to reach a conclusion. (Baumol & Blinder, 2011) They can be compared on the following four characteristics. No. of firms Monopoly is an industry which is comprised of a single firm who is undeniably the price maker with extensive control over the market. He is known to maximize profit through controlling output in the market. He will increase the output only if his marginal revenue is greater than its marginal cost, which will ultimately result in maximization of profits. Utility service providers are a perfect example of monopoly. In contrast, perfect competition is an industry comprised of large number of small firms, each with absolutely no control over price. They are the price takers and follow price set by the demand and supply principl es. For instance, soybeans market in California is an example of perfect competition as there are many buyers and sellers and price is set where demand and supply meets. Available Substitutes: A monopoly firm produces a unique product which has no close substitutes. Monopoly being the sole producer of the product can control the market and influence price through this characteristic. There is hardly any other company providing railway services then one in county. This gives the company a monopoly power as no close substitute is available. In contrast, a perfectly competitive industry produces identical products with limited or no differentiation in products. This industry has infinite number of substitutes which are readily available in the market. This characteristic does not allow perfectly competitive firms to charge higher than the market price. Resource Mobility: Monopoly structure contains strong barriers to entry which is the prime reason for monopolies to exist. . Adding up, there are four primary advantages that allow the monopoly firm to enjoy power and restrict the other firms to enter the market. These are economies of scale, economies of slope, cost complementary and patents. This restricts any other player to enter the market even if abnormal profits are on offer. Pharmaceutical firms pay large sum of money to buy patents which restricts other manufacturers to enter the market. In contrast, perfectly competitive firms have absolute freedom to enter or exit the industry. There are no barriers for them which does not all this structure to enjoy abnormal profits as companies enter to reap profits when they notice a probability of such a scenario. If this scenario occurs, then firms will enter the market to reap those profits which will shift the supply curve to right as shown in the graph below. The supply curve shifts from S0 to S1 which will reduce the market price from P0 to P1 that would eventually result in dipping profits. On the other hand, i f the firm in short run incurs losses, it will leave the industry and force the supply curve to left or upward from S0 to S2 , which will increase market price from P0 to P2 and hence; the firm that remain in industry will enjoy increased profits (Lambert M. Surhone, 2010). This fluctuation will remain until average cost of product is equal to market price. S1 S0 P MC S2 AC Pe Pe = MR = MC Information: In a monopoly, the information obtained by the company is