Monopoly and Monopolistic Competition



  • Monopoly is a market structure in which a single firm makes up the entire market.
  • Monopolies exist because of barriers to entry into a market that prevent competition.
  • Barriers to entry include legal barriers, sociological barriers, and natural barriers.

Monopoly is that market form in which a single producer controls the entire supply of a single commodity which has no close substitutes. There must be only one seller or producer. The commodity produced by the producer must have no close substitutes. Monopoly can exist only when there are strong barriers to entry. The barriers which prevent the entry may be economic, institutional or artificial in nature.


1. There is a single producer or seller of the product.

2. There are no close substitutes for the product. If there is a substitute, then the monopoly power is lost.

3. No freedom to enter as there exists strong barriers to entry.

4. The monopolist may use his monopolistic power in any manner to get maximum revenue. He may also adopt price discrimination.


The Key Difference Between a Monopolist and a Perfect Competitor


  • For a competitive firm, marginal revenue equals price: P = MR
  • For a monopolist it does not.

The monopolist must take into account the fact that its production decision will simultaneously set price

A competitive firm is too small to affect the price

  • It does not take into account the effect of its output decision on the price it receives.

A competitive firm’s marginal revenue is the market price

  • A monopolistic firm’s marginal revenue is not its price – it takes into account that its output decision can affect price.


Definition of ‘Monopolistic Competition’

Monopolistic competition differs from perfect competition in that production does not take place at the lowest possible cost. Because of this, firms are left with excess production capacity.

A type of competition within an industry where:

1. All firms produce similar yet not perfectly substitutable products.

2. All firms are able to enter the industry if the profits are attractive.

3. All firms are profit maximizers.

4. All firms have some market power, which means none are price takers.












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