Perfect competition refers to a market structure where there are many producers and buyers in the market. In this market, the buyers and sellers have access to sound information concerning developments in the marketplace and products, and therefore, no party has an advantage over the other. Unlike other market structures that have barriers to market entry and exit, under perfectly competitive market the firms are free to enter and depart the market as there are no hindrances to either entry or exit. Companies in perfectly competitive market earn normal profits, products generated are homogenous, and the price mechanism sets the price (Arnold, 2013). On the other hand, a monopoly includes a market structure that has only one producer. The monopoly power is usually derived from the economies of scale, control of raw material used in production or government regulation. As a result, this market structure has obstacles to market entry and exit. Due to lack of competitors and close substitutes, the monopoly has the power to set the price that will yield the highest paybacks possible. Moreover, a monopoly can make abnormal profits both in short run and long run (Gillespie, 2014).
Outcome for the Society
Disparities arise between the perfect competition and monopoly when it comes to efficiency. Firms under perfectly competitive market structure exhibit both allocative and productive efficiencies. On the other hand, a monopoly is both allocative and productive inefficient (Laibson & List, 2015). Therefore, perfectly competitive market results in a better outcome for the society than a monopoly.
When a firm allocates resources to the production of goods and services in a manner that result in best outcomes for the community, the business exhibits allocative efficiency. The occurrence of allocative efficiency shows that the price and marginal cost are the same (McTaggart, Findlay, & Parkin, 2015). In perfect competition, the companies produce at a point where the marginal cost and the price are identical, and hence there are allocative efficient.
Figure 1: Allocative efficiency in perfect competition market
On the figure one above, the firm produces at point E where the marginal cost and price matches, that is, MC = P. Thus allocative efficiency is attained meaning that the resources are well allocated in the interest of the society.
As stated earlier, a monopoly is allocative inefficient. The allocative efficiency condition that marginal cost should match the price is not attained under a monopoly. Instead, the price exceeds the marginal cost and thus inefficiency. On figure two below, a monopoly firm operates at point K generating profit maximizing output Q. However, if the company was allocative efficient, then it will run at point E producing allocative efficient quantity Q1. Therefore, the resources are underutilized when there is a single seller in the marketplace.
Figure 2: Allocative inefficiency in Monopoly Market Structure
Productive efficiency occurs if the company generates at the lowest point of the average cost curve. The occurrence of productive efficiency is a signal that there is no excess capacity and that the resources are well utilized for the benefit of the community. In the perfectly competitive market, the firms are in a position to attain productive efficiency since the production takes place the lowest point of the average cost curve (Sloman, Wride, & Garratt, 2015). On figure three below, the firm is producing at the minimum point of the average cost curve, that is, E and thus the enterprise in the perfectly competitive market is productive efficient.
Figure 3: Productive efficiency in perfect competition market
Figure 4: Productive inefficiency in Monopoly Market Structure
A monopoly does not operate at the minimum point of the average cost curve and thus productive inefficient. On figure above, the company produces Q though the productive efficient output is Q1. This excess capacity exhibits that the resources are underused.
The inefficiencies displayed by a monopoly shows that the society can be disadvantaged on the existence of a single producer in the market. For example, the monopoly will charge high prices and thus significantly reduces the welfare of consumers. Moreover, a monopoly is likely to produce commodities of low quality and quantity knowing that the products will be bought due to the non-existence of alternatives (Arnold, 2013). In the case of such occurrences, then the society will be made more badly off.
Despite the above shortcomings arising from a monopoly, it does not mean that a monopoly is always undesirable. Monopolies exist in the real world as opposed to perfect competition which is hypothetical. A monopoly is in a position to generate several benefits that can be enjoyed by the whole society. For instance, the profits earned by a monopoly are high. The firm can make use of the proceeds to carry out research and development to improve productivity and also avail products of higher quality to the consumers. Some monopolies often employ price discrimination strategy, a situation that takes care of the needs of economically disadvantaged groups in the society. Furthermore, a monopoly can produce on a large scale leading to a reduction in the average cost, an advantage that can be availed to the consumers by reducing the prices of commodities (McTaggart, Findlay, & Parkin, 2015). Nevertheless, it should be noted that the costs that may arise from a monopoly can exceed the benefits. Therefore, monopoly supremacy should be regulated and strategies put in place to bar the emergence of monopolies in an economy.
A perfect competition is characterized by numerous sellers and buyers, freedom of entry and exit, homogenous products as well as accurate information. On the contrary, monopoly market is marked by a single vendor, supernormal profits in the short term and long term, and barriers to market entry and exit. Companies operating under perfectly competitive market structure exhibit both allocative and productive efficiencies while a monopoly is both allocative and productive inefficient. Thus, perfectly competitive market results in a better outcome for the society than a monopoly.
Arnold, R. A. (2013). Economics. Mason, Ohio: South-Western.
Gillespie, A. (2014). Foundations of economics. Oxford : Oxford Univ. Press.
Laibson, D., & List, J. A. (2015). Principles of (Behavioral) Economics. American Economic Review , 105 (5), 385-390.
McTaggart, D., Findlay, C. C., & Parkin, M. (2015). Economics. Frenchs Forest, N.S.W: Pearson.
Sloman, J., Wride, A., & Garratt, D. (2015). Economics (9th ed.). Harlow : Pearson.