Introduction.
Predominantly, Perfect Competition is characterized by the existence of massive small firms with many buyers. Notably, there are no entry barriers and firms are price takers .Further, there’s free movement of information and knowledge flow between consumers and suppliers. Moreover ,in a perfect competition, all the many firms produce and identical product .In addition, firms in this market structure will record normal profits (Tejvan ,N .d)The non-existence of entry barriers encourages more firms to join thus boosting competition.
Notably, Monopoly is characterized by one seller with massive buyers in its market structure. Moreover, the supplier offers a product lacking close substitutes. Furthermore, the monopoly sets its own price due to the fact that it controls the output. There’s high entry barriers thus eliminating competition (Kumar, N .d) Further, monopolies have high entry and exit barriers which bars competition .In addition, monopolies enjoy large economies of scale which allows monopolies to engage in research and development.
Merits and demerits of Monopoly
Due to the ability to make supernormal profits, monopolies can indulge in research and development thus boosting product or service quality and efficiency (Tejvan, N. d) Following large economies of scale enjoyed by monopolies, consumers are likely to enjoy relatively low prices. Despite monopolies being inefficient, they are successful .Monopolies are attractive due to the ability to make supernormal profits. Further, monopolies could go global thus boosting export revenue (Economics Online, N. d)
Through creative destruction, monopolies could convert to efficient firms .Monopoly power can be abused through exploitative pricing .Also, monopolies limit consumer choice because there is production of goods and services by one seller, controls output since it is the only supplier firm and controls the price which ultimately affects the output levels thus restricting consumer surplus and limits consumer welfare through the existence of monopoly power which implies a large market share. Monopoly power can easily be abused by monopolies to maximize their profits thus the need for government intervention through antitrust laws.
Merits and Demerits of Perfect Competition.
Remarkably, perfect competition offers productive and allocative efficiency to its firms .Also, there’s perfect information and knowledge flow between firms and consumers. Further, due to the existence of many firms, there’s consumer variety and surplus .Due to surplus production, consumers are likely to enjoy relatively low product prices(Economics Assist, N. d) However ,perfectly competitive firms do not enjoy large economies of scale, lack research and development capacity .
Furthermore, there are low chances of technological advancement due to perfect flow of information among industry players(Economics Assist, N. d)Predominantly ,it’s nearly impossible to achieve a perfect competition market structure. Notably, perfect competition boosts consumer sovereignty and spares advertisement costs for firms in this market structure However, perfect competition curtails innovation and firm profits depend on strategic firm location due to the existence of many firms in the market.
Productive efficiency is for perfect competition as opposed to monopolies this is because of low production cost in a perfect competitive market .In a perfect competitive market, the cost of production is way below the marginal cost thus making the marginal curve lower than the average cost curve (Sanandres, N. d.)However, for monopolies, the production cost is above the marginal cost thus making the average cost to be higher than the marginal curve. Typically, the price of goods and services directly affects the output or the quantity supplied.
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Source:Sanandres,
Similarly, Allocative efficiency is impossible for monopolies unlike perfect competition (Sanandres ,N .d) However ,monopolies are dynamically efficient whereas perfect competitive markets are statically efficient. Collectively, monopolies and perfect competitive firms both seek to maximize profits thus they all deal with production and cost responsibilities (Boundless, N .d.)Under perfect competitive price is similar to marginal cost whereas in a monopoly prices are above marginal cost. At equilibrium, monopoly prices are high and the output is low thus making it economically inefficient whereas for perfect competition, prices are low and equal to output level (Boundless, N .d)
Overall, monopolies and perfectly competitive markets have both positive and negative effects on the economy and consumers globally .For monopolies, there's room for technological and innovative advancement due to research and development capacity which is difficult for small firms in a perfectly competitive market .Perfect competitive firm offer consumer surplus and variety which is unavailable under monopolies. Further, perfect competitive markets boost consumer sovereignty due to the fact that the price of goods and services are taken by the firms and not set thus consumer welfare is guaranteed under this model of market structure.
However, monopolies exercise monopoly power in controlling the markets share and setting the prices of goods and services. This vulnerability of abuse of monopoly power exposes consumers to exploitation which is not ideal for consumers and other economy players. Typically, monopolies have monopoly power due to the large market shares .Monopoly power can be abused through exploitative pricing. However, governments have intervened to protect consumers from abuse of power through the implementation of antitrust laws and other policies and measures.
Conclusion.
Arguably, perfect competitive markets have better outcomes as compared to monopolies. Despite being unrealizable, perfect competition is the ideal global market structure due to the advantages and less limitations it offers. Unlike monopolies, Perfect competition offers consumer variety ,surplus and standardized quality while maximizing profits for the operating firms in its market structure. Furthermore, under perfect competition, free trade is encouraged due to the non-existent entry and exit of firms .Free entry and trade is likely to have better outcomes as compared to restricted trade arrangements. Through free entry of firms into the market, competition is encouraged which means more revenue for the government and operating firms .Further, there will be more employment opportunities due to the entry of many small firms into the industry. However, monopolies have fewer advantages and more disadvantages. Productively and allocative, monopolies are inefficient thus making its outcomes less favorable as compared to perfect competition .In addition, monopolies are economically inefficient thus making perfect competition the better market structure due to its economic efficiency and better outcome.
References
Boundless. (N .d)Market Differences between Monopoly and Perfect Competition .Boundless. Retrieved from https://www.boundless.com/economics/textbooks/boundless-economics-textbook/monopoly-11/monopoly-production-and-pricing-decisions-and-profit-outcome-71/market-differences-between-monopoly-and-perfect-competition-267-12364/
Economics Assist. (2013)Advantages and Disadvantages of Perfect Competition .World Press. Retrieved from https://economicsassist.wordpress.com/2013/06/03/advantages-and-disadvantages-of-perfect-competition/
Economics Online. (N .d) Monopolies. Economics Online. Retrieved from https://www.economicsonline.co.uk/Business_economics/Monopoly.html
Kumar, M. (N .d) Monopoly: Meaning, Definitions, Features and Criticism!. Economics Discussion .Retrieved from https://www.economicsdiscussion.net/monopoly/monopoly-meaning-definitions-features-and-criticism/7268
Parikh, V.(2015)Advantages and Disadvantages of Perfect Competition .Let Learn Finance. Retrieved from https://www.letslearnfinance.com/advantages-and-disadvantages-of-perfect-competition.html
Sanandres .(N .d)Economic efficiency in perfect competition and Monopoly. Sanandres.Esc Retrieved From https://www.sanandres.esc.edu.ar/secondary/economics%20packs/microeconomics/page_122.htm
Tejvan. (N .d ) Advantages of Monopoly .EconomicsHelp.Org. Retrieved from https://www.economicshelp.org/microessays/markets/advantages-monopoly/
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