A Perfectly Competitive Market
A perfectly competitive market is one in which no single firm influences either the equilibrium price of the market or the total quantity supplied in the market. Thus, a firm operating in a competitive market has no incentive to supply at a price lower than market equilibrium price, as it can sell all that it wants to supply at equilibrium. At the same time, the firm cannot sell its products at price higher than the market price, because it will risk losing customers to the competitors, and its sales volume will drop drastically. Under perfect competition, all the prices are determined by forces of demand and supply. Sellers are just but price takers. On the other hand, a monopoly firm is the only supplier in the market and therefore has total control over the market prices and market supplies. Therefore, a monopolist will operate the industry like a single firm and in order to achieve the goal of profit maximization, it will set its MC curve equal to the MR curve. The prices will, therefore, be forced to move up and as a result, the production will be reduced. The monopoly firm charges higher prices and produces less output than a firm in a perfectly competitive market. In particular, the monopoly price is not equal to marginal cost, which means a monopoly does not efficiently allocate resources.
One of the reasons for this differential is that in a perfectly competitive industry, each and every firm produces the same products as other firms; this means that there are several substitutes. A monopoly firm, on the other hand, produces a unique product which does not have close products. Consumers are therefore left with no choice other than buying the product at whichever price the firm dictates. Also, a monopoly firm prevents other firms from entering the market hence acquiring a monopoly status. Another reason is that for the Perfect Competitive market structure, new firms can easily enter the market structure, as there are no barriers to entry. This means that new firms who knows that there is a profit to be made in some area, location or industry can easily set up a new shop there. For the monopoly, there is a substantial or high barrier of entry preventing new firms from entering the market structure. This means they have no control to increase the price of the product. This is because if they increase the price of the product, and there are perfect competition, firms who increase the price, will lose out to other firms. Hence firms under Perfect Competition market are considered to be price takers. Firms in a monopoly market, on the other hand, are Price Makers. This means that they can easily influence the price of their product sold to consumers. For the Perfect Competition firm, they earn an abnormal profit in the short run, whereas it is not possible in the long run (Miller, 2002). This is because, in a Perfect Competition market structure, when existing firms earn a profit, new firms will enter the market structure, reducing the profit. For the monopoly firm, there is a possibility to earn an abnormal profit in short run and long run, as there is the existence of barriers to entry to prevent new firms from entering the market.
The monopoly firm is not effective in that it charges very high prices and produces very low output as compared to the perfectly competitive firm. If the monopolist benefits from economies of scale, they will have little incentive to control the production costs and this will mean that there will be no real cost savings in the firm. The very high costs of production reflect that the firm is not exhausting the very scarce resources available. Since the monopoly price is high than the average costs, this leads to loss of locative efficiency and poor market mechanism. However, a monopolist is not totally ineffective. This is so because a monopolist might be better positioned to exploit economies of scale leading to an equilibrium which gives a higher output and a lower price than under competitive conditions.
Lack of competition may give a monopoly firm less incentive to invest in new ideas or consider consumer welfare. A monopolist will continue enjoying abnormal profits at the expense of the customers who will be straining economically. Consumers will, therefore, be taken advantage of because they have nowhere to turn to for substitutes. There is also an exercise of price discrimination in a monopoly. This is where similar products are sold to different customers at different prices. With the monopoly in place, consumers experience less social welfare because of the high prices that are charged, the low productivity and at times there is an even poor quality of goods and services.