A Perfectly Competitive and a Monopolistic Market Structures

Research
Student:
Professor:
Course title:
Date:
Research
A perfectly competitive market and a monopolistic market are 2 market structures which have a number of major differences, for instance with as regards barriers to entry, price control, as well as share of the market. This paper provides an exhaustive discussion of the perfectly competitive and monopolistically competitive market structures, and the main factors which differentiate them are identified. Two different Australian industries which represent monopoly and monopolistic competition are identified and discussed. The characteristics of these industries and their products which can be utilized to explain the differences between these two market structures are discussed. Lastly, different price discrimination strategies that are available to business organizations are described, and the price discrimination behaviour of the previously identified industries are evaluated.
1.0 Perfectly competitive and monopolistically competitive market structure
1.1 Perfectly competitive market structure
The 4 main features of a perfectly competitive market structure are as follows: undifferentiated products and services; there are many small companies; there is perfect knowledge of technology and prices; and there is perfect resource mobility/no barriers to exit and entry (Romano, 2012). Large number of small companies: a market structure which is perfectly competitive is made up of many small companies and each of these firms is comparatively small in comparison to the overall size of the market. This makes sure that not any one company is able to wield market control over quantity or price. If one company in a perfectly competitive market decides to increase its output by twofold or to completely cease producing its products, the market would not be affected. In essence, the price will not change (Peress, 2010). Furthermore, there would be no perceptible change in the quantity that is exchanged.
Companies produce identical, undifferentiated products: every company in a market that is perfectly competitive sells a similar good, often referred to as homogeneous products. The main characteristic of this feature is not really that the products sold are not perfectly or exactly identical, but that consumers are not able to notice any distinction. Consumers are particularly not able to tell which company makes which particular product. There are no unique features such as brand names which distinguish products by company. This basically implies that each company in a perfectly competitive market structure produces a product which is actually a perfect substitute for the output of every other company within the market (Peress, 2010). For this reason, no single company could charge a different price compared to the price that other companies charge. If any company tries to charge a higher price, the consumers would shift straight away to other products which are perfect substitutes.
Perfect resource mobility or freedom to exit out of and entry into the industry: in a market structure that is perfectly competitive, companies are free to enter an industry or leave it. The companies are actually not limited by start-up costs, government regulations or rules, or any other entry barriers. Even though some companies require permits from the government before entering an industry or they incur high start-up costs, this is really not the situation for companies which are perfectly competitive. Similarly, a perfectly competitive company is not prevented from existing the industry like is the case for public utilities which are regulated by the government (Etro, 2014). It is worth mentioning that in a perfectly competitive market structure, companies are able to acquire whatever resources they need such as capital or labour immediately and devoid of any restrictions. Discrimination basing on gender, ethnicity or race is non-existence.
Perfect knowledge of technology and prices: the other characteristic is that in a market structure that is perfectly competitive, consumers are totally aware of the prices of the sellers and therefore one company cannot sell its goods or services at a price that is higher compared to the price of other companies. The company is the price taker and the industry is the price maker. This is illustrated in the figure below (Hill & Myatt, 2010):
Price The industry is the price maker
 $
 P
 D
Q Quantity
In addition, every seller in this market has full information with regard to the prices that other sellers are charging and therefore they do not unintentionally charge less than the current market price for that particular product. It is notable that perfect knowledge also includes technology. Companies in this market structure have access to similar techniques of production. As such, there is actually no company that is able to produce its output cheaper, better or faster than others due to special knowledge of information (Hill & Myatt, 2010).
The aforementioned 4 traits imply that no perfectly competitive company is able to wield any control over the market whatsoever. The large number of small companies, where each of them produces similar goods, implies that there are so many perfect substitutes for the output produced by any particular company (Sawyer, 2010).
1.2 Monopolistic competitive market structure
In a market that is monopolistically competitive, prices for services and goods are by and large high given that companies have complete control of the market. Companies in a monopolistic market are price makers since they control the market prices of services and goods. On the whole, this market structure is typified by many small companies, all companies sell the same but not identical products, there is comparative freedom of entering into and leaving the industry, and there is broad knowledge of technology and prices (Papandreou, 2011). Many small companies: there are a large number of small companies in an industry which is monopolistically competitive, and each company is comparatively small than the overall market size. This makes sure that every company is moderately competitive with very slight market control over quantity and price. Basically, every company in this market structure has numerous possible competitors. Since there are many companies, competition is intense.
Products sold by companies are similar but differentiated: every company in this market structure sells the same product, although the products are not totally identical. In essence, the products sold by companies in a monopolistically competitive market are actually close substitutes for one another, but they are not perfect substitutes. Every product meets the same basic need or want of the customers. It is notable that the products may only be seen as different by the consumers or they may have actual but slight physical dissimilarities. No matter the reason, the consumers consider the products as similar, but different (Hill & Myatt, 2010). The companies sell products which are differentiated. In contrast to a perfectly competitive market structure, the products are not identical.
Extensive knowledge: consumers in a monopolistically competitive market structure do not really know everything. Even so, they have comparatively full information with regard to alternative prices. In addition, buyers have comparatively full information as regard brand names, product differences, among other things. Every firm also has comparatively full information with regard to techniques of production as well as the prices which their competitors charge (Sawyer, 2010). Relative resource mobility: companies in this market structure are comparatively free to enter and leave the industry, although there may be some restrictions, just a few not many. The companies in a monopolistically competitive market structure are not perfectly mobile like companies in a perfectly competitive market. However, they are mainly not restricted by significant barriers to entry such as start-up cost or government regulations/rules. Entry and exit barriers are low.
Monopolistic competition in the short run
It is notable that at maximization of profit, MR = MC and price is P and output is Q. Since price AR is more than ATC at Q, the company can achieve supernormal profits – area PABC.
Costs and Revenue The short run
 MC
 P A
ATC
C B
AR

Q MR Output
As new companies penetrate the market, the demand for the products of the existing companies will become more elastic and demand curve will move to the left, which will cause prices to drop. In the end, the supernormal profits get eroded (Etro, 2014). This is illustrated in the diagram above.
2.0 Industries in Australia representing monopoly and monopolistic competition
In Australia, an industry that represents monopoly competition is the electricity industry in Western Australia since it is dominated by a single corporation, Western Power, which maintains monopoly on electricity delivery. Western Power is a self-contained, isolated network with a natural monopoly. It is governed by an autonomous board and it reports to the Minister of Energy of Western Australia (Connolly, 2015). Its clients include the local government, contractors, developers, businesses and residential customers. The industry which represents monopolistic competition is the clothing industry given that companies have differentiated products as well as market power.
2.1 Monopolistic competitive market
In the monopolistic competitive clothing retail industry in Australia, the market has the following traits: there are many companies that provide the service or good; the companies are able to make decisions independently; the market has products which are very much differentiated, which means that there is a view that the products are different for other reasons besides price (Hill & Myatt, 2010). The products are somewhat different but they serve the same purpose.
2.1.1 Market outcome in the monopolistically competitive clothing retail industry
The sellers or firms in the clothing retail industry wield some control over pri...