Monopolistic Competition Vs Perfect Competition
Perfect competition is the market structure in which there are many sellers and buyers, firms produce a homogeneous product, and there is free entry into and exit out of the industry (Amacher, R., & Pate, J., 2013). The model of perfect competition is defined by many buyers and sellers to the extent that the supply of one firm makes a very insignificant contribution to the total supply. Both the sellers and buyers take the price as given. This implies that a firm in a perfect competitive market can sell any quantity at the market price of its product and so faces a perfectly price elastic demand curve (Bettie, B. R., & Lafrance, J. T., 2006).
Long Run Equilibrium for the Firm
The industry is in long-run equilibrium when …show more content…
The producers produce differentiated substitutes. Hence there is competition between them. The difference from perfect competition is that the products are not homogeneous. There is freedom of entry into the industry so that an individual firm can make surplus profits in the short-run but will make normal profits in the long-run as new firms enter the industry. Monopolistic competition has the following distinguishing features from monopoly: As the products are differentiated substitutes of existing products, each make or type has its own sole seller. For example, each make of toilet soap is produced by only one firm. If one firm raises its price, it is likely to lose a substantial proportion of its customers to its business rivals. If it lowers the price, it is likely to capture a significant proportion of customers from its business rivals. However, in the first case, some of its customers will remain loyal to it and in the second case some customers will remain loyal to their long-established suppliers. Hence, as in the case of monopoly the demand curve for the firm slopes downwards, but it is more elastic than in a …show more content…
Oligopoly in the market describes a situation in which:
Firms are price makers
Few but large firms exist
There are close substitutes
Non-price competition manifest itself in the form of product differentiation
Supernormal profits re-earned both in the short run and long run.
Because the sellers are few, then the decisions of sellers are mutually inter-dependent and they cannot ignore each other because the actions of one will affect the others.
Pricing and Productivity Decisions of the Firm
The price and output shall depend on whether the firm operates in:
Pure oligopoly or
Oligopolists normally differentiate their products. But this differentiation might either be weak or strong. Pure oligopoly describes the situation where the differentiation of the product is weak. Pricing and output in a pure oligopoly can be collusive or non-collusive.
Collusive oligopoly refers to where there is co-operation among the sellers i.e. co-ordination of prices.