To understand and verify “perfect competition is a myth but monopolistic competition is reality” statement, it is essential to study the meaning as well as features of perfect competition and monopolistic competition. Then, it must be explained how perfect competition is a myth.
Perfect competition is that market situation in which there is a large number of buyers and sellers. They produce identical products and the price of such a product is determined by. An industry. All the firms accept this price i.e. firms are price takers.
Perfect Competition Definition
According to Leftwitch, “Perfect competition is a market in which there are many firms selling identical products with no firm large enough relative to the entire market to be able to influence the market price.”
Features of Perfect Competition
Mainly the following features are observed in a perfectly competitive market:
- A Large Number of Buyers & Sellers
- Homogenous Products
- Free Entry & Exit
- Perfect Knowledge
- Perfect Mobility
- The Shape of Average & Marginal Revenue Curves
A Large Number of Buyers & Sellers
There is a large number of buyers and sellers of a commodity in the market. Since there is a large number of firms so each firm supplies only a small part of the total supply in the market. Thus, no firm can influence the price of the product.
In perfect competition, all the firms produce homogenous products. It means products are identical in color, size, and quality, etc. Thus, the goods of all forms are perfect substitutes for each other.
Free Entry & Exit
Any firm from outside the industry may enter the industry and any form working in the industry may leave it whenever it desires. Thus, there are no restrictions on the entry and exit of the firms.
Buyers & Sellers have complete knowledge of the market conditions. The buyer knows what prices sellers are selling a given product and sellers have full knowledge of the factor for prices as well as the price of goods determined by the industry.
In this market, factors of production are perfectly mobile. Factors can also move from low paid to high paid industry.
The Shape of Average & Marginal Revenue Curves
Under perfect competition, each seller sells his goods at the same price. The price is determined by the industry. In this market, the price Is determined by the forces of demand and supply and a dorm has to accept this price. Thus, the price of a good i.e. the average revenue of the firm remains constant.
Monopolistic competition refers to that market situation in which many producers produce goods which are close substitutes of one another i.e. these can be used in place of each-other. Thus, product differentiation is a hallmark of the monopolistic competition. The product differentiation may be in the form of a name, brand, trademark, color, packing, etc.
Monopolistic Competition Definition
According to Leftwitch, “Monopolistic competition is a market situation in which there are many sellers of a particular product but the product of each other is in some way differentiated in the minds if consumers form the product of every other seller.”
Features of Monopolistic Competition
The following are the main features of monopolistic competition:
- A Large Number of Firms
- Product Differentiation
- Selling Cost
- Entry & Exit
- Lack of Perfect Knowledge
- Nature of AR & MR curves
A Large Number of Firms
There is a large number of forms that individually have a small share in the market. Each firm has limited control over the market. Each form can decide its own price policy.
Product differentiation is a very important feature of monopolistic competition. It means a buyer can easily distinguish one product from others.
Another important feature of monopolistic competition is the existence of selling costs. Every firm spends a lot of money on publicity and advertisement of its product. These expenses which promote and push up the sales are called selling costs.
Entry & Exit
Firms under monopolistic competition are free to join and leave the industry. But a firm can produce only a substitute for existing brands. No firms have no absolute freedom to enter the industry.
Lack of Perfect Knowledge
Under monopolistic competition, buyers and sellers are ignorant about the prices of the product because it is not possible to compare the products of different firms due to product differentiation.
Nature of AR & MR curves
Demand (AR) curve of affirming under monopolistic competition slopes downward to the right. It is more elastic. It means by a small increase or decrease in price; a firm will lose or gain much in its sale.
Perfect Competition is a Myth But Monopolistic Competition is Reality
Perfect Competition is a myth because there is no market in which the conditions of perfect competition are satisfied but some economists have pointed out that it is found in the field of agriculture like rice, wheat, etc.
Producers compete with each-other unconsciously because none of them is able to influence the price of rice, wheat, etc. in the market. But in actual life, there is no market in which perfect competition exists. This is because the conditions of perfect competition are being violated in one way or the other. It becomes clear from the following facts:
- It is essential for the presence of perfect competition that the buyers, as well as sellers, have complete knowledge of the market but in reality, they do not have this knowledge.
- Under perfect competition, the price is determined by the equilibrium of the market forces of demand and supply but in the real world, the government has control over the demand as well as the supply of a number of products, as a result of which, no automatic adjustment takes place.
- In perfect competition, there is no restriction on the entry and exit of firms in the industry but in fact, a number of natural and artificial restrictions are observed on the entry of new firms.
- It is essential for perfect competition that perfect mobility must exist in factors but imperfect mobility is found in factors due to factors like language, family affection, etc.
- Under perfect competition, neither buyers nor sellers can affect the market price but in reality, they can influence the price by forming their own groups.
- A lack of transport and advertising cost is observed in perfect competition whereas it is not possible in the real-world to trade in the absence of these costs.
Thus, it is clear that perfect competition is a myth but monopolistic competition is reality. Have any questions? Do let us know in the comments below.