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The Difference Between

What is the difference between perfect competition and monopoly competition?

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2011-06-06 06:23:49

In perfect competition, the market consists of a large number of

buyers and sellers of an identical good. A real world example that

is close to this is the market for farm commodities, such as wheat

or soybeans. The critical feature is that there are so many buyers

and sellers that each buyer and seller assumes that their behavior

will have no impact on the final market clearing price. That is,

they assume the price will be $X no matter how much they buy and

sell and furthermore they assume that they can buy and sell as much

of the good as they want/can afford at that price. This sort of

assumption is called "price taking behavior".

In contrast, a monopolistically competitive market has many

sellers, but they each sell a unique good. A good example of this

is the soda market, which has many competing sellers such as Coke,

Pepsi, Royal Crown, 7up, etc. Here, each seller can set whatever

price they want for the good that they control, but they have to

take into account how many other goods are close substitutes for

the good that they sell. If there are many close substitutes, the

end result will be similar to a perfectly competitive market; each

seller will earn zero economic profit. In contrast, if no close

substitutes exist, the market is a plain old monopoly and the

monopolist earns economic profits.


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