Competitive and Monopoly Market Structures

In a competitive market, price equals to marginal cost. In a scenario that, the books are produced in low quantity, the price can't surpass marginal cost. Thus, in the left hand side of Figure 1, on condition that MSB goes beyond MSC, society is gone better off via enhancing product output. 

Conversely, as the quantity of production is enhanced, production's marginal costs enlarge. Thus, the producing extra books entails higher marginal costs compared to benefit of society which is proportional to buyers' motivation to pay for books. As a result, given that MSB is lower than MSC, which is in the right-hand side of Figure 1, society is gone better off by declining quantity.

In the chart below, Marginal Social Benefit (MSB) is higher than the Marginal Social Cost (MSC). MSC can be defined as the additional expense to society associated for producing one more book and it has increasing slope. MSB is equivalent to the additional benefit for society to produce one more book and it has decreasing slope.

 

Figure 1: Price vs. quantity graph of a book production

Consequently, allocative efficiency happens where the marginal social benefit is equal to marginal social cost or price is equal to marginal cost. In the competitive markets, industry firms are forced to manufacture the goods at the quantity where its average total cost is at the lowest possible level. 

Thus, productive and allocative efficiency can be discussed in these types of markets. However, in the monopoly markets, producer is not generating the goods at the lowest level of its ATC curve which yields productive inefficiency. Besides, in monopoly markets, price is higher compared to ATC. Thus, producer is generating in lower quantities with higher prices which yields allocative inefficiency. Therefore, competitive markets have lower market power and more efficiency, whereas monopoly markets have more market power and lower efficiency. 

Since the quantity of produced goods in monopoly markets is lower compared to competitive ones and also the price is higher, the yellow shaded area in Figure 4 is stated as the deadweight of monopoly markets which characterizes loss in buyer surplus and causes welfare loss for monopoly markets.

Figure 2: Welfare loss in monopoly markets

As the efficiencies for both markets are compared in a general perspective, cost inflation can be stated as major factor for inefficiency of competitive markets and technological progress related with R&D activities are important for both markets to enhance efficiency. 

In Table 1, the other structural features of both competitive and monopoly markets are discussed in a comprehensive manner. In the competitive markets, price is equivalent to MC, whereas in monopoly, price is higher than the average cost. Although, there exists no restriction for entering or existing the competitive markets, robust barriers are available in monopoly ones. 

In a monopoly market, the same good can be sold to different consumer groups with different prices by considering other factors. 

 

perfect competition

perfect competition and monopoly

difference between perfect competition and monopoly

monopoly and monopolistic competition

monopolistic competition long run

characteristics of monopolistic competition

monopolistic competition examples

 

 

However, in competitive market there is no such discrimination. Moreover, the variation among price and MC in monopoly market causes super-normal profits. Alternatively, market competition leads firms to stay under normal profits. Even though the competitive markets have predictable supply curves, in monopoly, it can't be known. 

In the demand side, demand curve in competition is elastic which depends on the number of firms in the market. Nevertheless, price is determined by monopolist in monopole market. However, under competitive and monopoly markets, firms are intended to maximize their profits in a rational manner.

Table 1. Structural characteristics of both markets

Market Structure	Competitive	Monopoly
Number of sellers	Many	Single
Impact of individual firm on price	No impact	Substantial impact
Homogeneity	Homogeneous	Differentiated products
Barriers against entrance	No entry barrier	Absolute entry barrier
Pricing strategy	Price taker	Price maker
Long-run profits	Normal	Capability of supernormal
Demand	Elastic	Inelastic
Sample markets	Capital, Finance	Transportation