Difference Between Perfect Competition and Monopolistic Competition

The monopolistic competition given by Chamberlin is characteristically closer to perfect competition. There are, however, significant differences between the two kinds of markets in respect of:

1. Number of Firms,
2. Nature of Products,
3. Nature of Competition,
4. Efficiency in Production and
5. Capacity Utilization.

1. Number of Firms:

The number of firms in both monopolistic competition and perfect competition is very large. But the number of firms under perfect competition is much larger than that under monopolistic competition. The number of firms in perfect competition is so large that an individual firm has absolutely no control over the price of its product: the price is determined by the market forces and is given to the firm.

However, under monopolistic competition, the number of firms is only so large that an individual firm does have the power to change the price of its product, especially under the condition of product differentiation. A firm can increase the price of its product and still retain some of its buyers (which is not possible under perfect competition), and if a firm cuts down the price of its product, it captures a part of the market of the rival firms. On the contrary, if a firm in perfect competition cuts down the price, it goes out of the market itself.

Moreover, the competitive firms are very small relative to the size of the market, whereas, in monopolistic competition, the firms are not so small in relation to the size of the market.

2. Nature of the Product:

Under perfect competition, the product is homogeneous and therefore, the product of each seller is treated as a perfect substitute for the product of other firms. Under monopolistic competition, on the other hand, there is product differentiation, and the product of each firm is a close substitute for that of the others.

3. Nature of Competition:

Under perfect competition with the homogeneity of products, there is practically no competition. Each firm faces a horizontal demand curve and sells any quantity without affecting the market share of other firms.

On the other hand, under monopolistic competition, the firms face a downward-sloping demand curve due to product differentiation. Competition between the firms may take the form of price competition or non-price competition, where the non-price competition takes the form of competitive advertising of the product by the firms.

4. Efficiency in Production:

Efficiency in production under monopolistic competition and perfect competition are compared on the basis of their equilibrium output. Though the rules for profit maximization are the same for the firms in both kinds of markets (i.e., MR = MC with MC rising), but still the equilibrium output under perfect competition is higher than that under monopolistic competition. Moreover, production under perfect competition is more efficient than under monopolistic competition.

5. Capacity Utilization:

In continuation with the issue of efficiency in production, it has been shown that capacity utilization under monopolistic competition is lower than that under perfect competition. It means that under monopolistic competition, there is underutilization of capacity, i.e. there is excess capacity under monopolistic competition, whereas there is none under perfect competition.

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