What is the difference between perfect competition and monopoly competition?

Answer 1

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.