What Are Monopolistic and Perfectly Competitive Markets?

A monopolistic market and a perfectly competitive market are two market structures that have several key distinctions in terms of market share, price control, and barriers to entry. In a monopolistic market, there is only one firm that dictates the price and supply levels of goods and services, and that firm has total market control. In contrast to a monopolistic market, a perfectly competitive market is composed of many firms, where no one firm has market control. In the real world, no market is purely monopolistic or perfectly competitive. Every real-world market combines elements of both of these market types.

Key Takeaways:

  • In a monopolistic market, there is only one firm that dictates the price and supply levels of goods and services.
  • A perfectly competitive market is composed of many firms, where no one firm has market control.
  • In the real world, no market is purely monopolistic or perfectly competitive.
  • In between a monopolistic market and perfect competition lies monopolistic competition or imperfect competition.
  • In monopolistic competition, there are many producers and consumers in the marketplace, and all firms only have a degree of market control.

Understanding Monopolistic and Perfectly Competitive Markets

Monopolistic and perfectly competitive markets affect supply, demand, and prices in different ways.

Monopolistic Markets

In a monopolistic market, firms are price makers because they control the prices of goods and services. In this type of market, prices are generally high for goods and services because firms have total control of the market. Firms have total market share, which creates difficult entry and exit points. Since barriers to entry in a monopolistic market are high, firms that manage to enter the market are still often dominated by one bigger firm. A monopolistic market generally involves a single seller, and buyers do not have a choice concerning where to purchase their goods or services.

Purely monopolistic markets are extremely rare and perhaps even impossible in the absence of absolute barriers to entry, such as a ban on competition or sole possession of all natural resources.

Perfectly Competitive Markets

In a market that experiences perfect competition, prices are dictated by supply and demand. Firms in a perfectly competitive market are all price takers because no one firm has enough market control. Unlike a monopolistic market, firms in a perfectly competitive market have a small market share. Barriers to entry are relatively low, and firms can enter and exit the market easily. Contrary to a monopolistic market, a perfectly competitive market has many buyers and sellers, and consumers can choose where they buy their goods and services.

Companies earn just enough profit to stay in business and no more. If they were to earn excess profits, other companies would enter the market and drive profits down. As mentioned earlier, perfect competition is a theoretical construct. As such, it is difficult to find real-life examples of perfect competition.

Monopolistic Competition

In between a monopolistic market and perfect competition lies monopolistic competition. In monopolistic competition, there are many producers and consumers in the marketplace, and all firms only have a degree of market control. In contrast, whereas a monopolist in a monopolistic market has total control of the market, monopolistic competition offers very few barriers to entry. All firms are able to enter into a market if they feel the profits are attractive enough. This makes monopolistic competition similar to perfect competition.

However, in a monopolist competitive market, there is product differentiation. Products in monopolistic competition are close substitutes; the products have distinct features, such as branding or quality. This is unlike both a monopolistic market, where there are no substitutes for products, and perfect competition, where the products are identical.

Pricing in perfect competition is based on supply and demand while pricing in monopolistic competition is set by the seller.