Market Competition Perfect and Monopolistic Competition

The business community continually changes and ownership of businesses change hands as smaller entities are swallowed up by bigger corporations. We hear about it all the time in the news, but yet very few people can name a example of monopolistic competition, or realise what the definition monopolistic competition is. This article gives a brief insight into the definition monopolistic competition and monopolistic competitive firm.

The definition monopolistic competition is firms which in effect hold a monopoly over their products, in that the firm is able to influence the market price of its product by altering the rate of production. Monopolistic competitive firms produce products that are not perfect substitutes or are at least perceived to be different to all other brands products.

Unlike in perfect competition, the monopolistic competitive firm does not produce at the lowest possible average total cost. Instead, the firm produces at an inefficient output level, reaping more in additional revenue than it incurs in additional cost versus the efficient output level.

It could be said, to name a example of monopolistic competition, firms who control oil production or gas production are monopolistic. They produce identical products except for branding, but due to a relatively low number of firms who control the vast amount of the product, can control the price to an extent by decreasing supply slightly.

The opposite of monopolistic competition is perfect competition. Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. While monopolistic competition is inefficient, perfect competition is the most efficient, with supply meeting demand and production therefore matching this, so stock is not sat in storage for prolonged periods or going to waste.

An example of a perfect competition is some agricultural markets, where supply is to meet demand. However, this example is not strictly the case in places such as Europe, where subsidies are provided encouraging farmers to produce as much as possible regardless of demand.

Perhaps the best examples of perfect competition companies would be large auctions of identical goods with all potential buyers and sellers present. By definition, a stock exchange resembles this. The flaw in considering the stock exchange as an example of Perfect Competition is the fact that large institutional investors (e.g. investment banks) may solely influence the market price. This, of course, violates the condition that "no one seller can influence market price".