What is the difference between perfect competition and monopoly competition?
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.