Difference between Monopoly and Monopolistic Competition

Economy and Finance

Difference between Monopoly and Monopolistic Competition

29 Aug 2023 Zinkpot 412

Monopoly is a type of market structure in which there exists only a single seller or sole producer of a product that has no close substitutes.
In this kind of market, there is only one seller or producer called the monopolist of a commodity. Since there is only one seller, any change in the amount of output produced by the monopolist would have a significant influence on the market price.
However, the number of buyers of the product is large. Consequently, no buyer can influence the price of the product under a monopoly. This thing makes a monopoly firm a price maker or a price setter of a commodity exercising considerable influence on the market.
A monopolist produces such a commodity, which has no close substitutes. It is an essential condition for the existence of a monopoly. If there are some other firms who are producing close substitutes of the product, there will be competition among them and the monopoly will cease to exist.
Monopoly is characterized by very high barriers to entry, which exist when entrepreneurs face obstacles while joining a profitable industry. These barriers may take several forms such as patent rights, copyright, government laws and economies of scale, etc.
Under monopoly, there are high chances of price discrimination i.e., when a producer sells the same product to different buyers at two or more different prices.
For example, Indian Railways - IRCTC is the only railway service provider of railway services in India. Coal India, Hindustan Zinc, HAL, Nestle, ITC Marico, etc. are some other examples of monopoly market structures in India.
Monopolist competition is the form of market in which there are many sellers of a particular product, with each seller selling somewhat differentiated, but close substitutes to the product sold by other sellers.
Product differentiation is the key element of monopolistic competition, though, the products produced by different firms are substitutes for each other but are not perfect substitutes.
The products can be differentiated based on physical characteristics such as physical and chemical components of the product such as differences in quality, size, design, color, or difference in packaging. Secondly, the products may also be differentiated based on conditions surrounding the sale of a product i.e., the location of the seller, his reputation efficiency, courtesy, trustworthiness, credit facility, etc.
This type of market is characterized by the free entry and exit of firms. There are no restrictions on the entry of new firms like there were in a monopoly type of market.
An important characteristic of monopolistic competition is that firms in this market compete by incurring selling costs or expenditure on sales promotion of their products.
The sales promotion measures may take the form of persuasive or competitive advertisements like advertisements in newspapers, tv commercials, and even door-to-door campaigns and discount offers as well.
A firm under monopolist competition can follow an independent price policy. It can make its own price and output decisions but the market demand determines the number of sales at these prices.
Bakery shops are a classic example of monopolist competition. In most towns, various bakeries sell similar products in slightly different ways.
Producers of bathing soaps from various brands such as Lux, Breeze, Godrej, Dove, etc. are examples of monopolistic competition.