The Difference Between a Monopolist & a Perfectly Competitive Firm

A monopoly occurs when a firm is the sole producer of a product or single seller of a service. Being the only player, a monopolistic firm controls the entire supply to the market, as there's no competition. A perfectly competitive firm, however, has no control of the market in which it operates because there are numerous players in the market offering the same products and services. A perfectly competitive firm competes for market share with other firms and can't influence market prices. If one perfectly competitive firm increases its product prices, consumers move to the other firms in the market because they offer the same products at a cheaper price.

Size and Numbers

Perfectly competitive firms are small in size in relation to the market size — and none of these firms control the market. Perfectly competitive firms are also referred to as "price takers." A monopolist firm, on the other hand, is larger and controls the entire market for its industry. Monopolistic firms are "price makers" by virtue of their market control.

The Nature of Products

Firms in perfectly competitive markets all manufacture the same kind of products or offer the same kind of service. This offers a substantial number of alternative firms dealing in the same products. For example, if a firm selling orange juice increases its prices considerably, consumers can opt to buy orange juice produced by another firm selling it at a cheaper price. On the contrary, a monopolist firm manufactures a unique product with no substitutes. A monopoly, therefore, is a single seller with a capacity to regulate supply and demand for its product.

Entering and Leaving the Market

Firms in a perfectly competitive market have the freedom to enter the market and leave at will. They may share and exchange information on production and price structures. The opposite applies to a monopoly: Firms in monopolistic markets prevent competitors from entering the market to maintain their monopolistic status. Examples of barriers include ownership of vast resources, government licenses, the high cost of establishing business and holding patents. A monopolistic firm may also be barred from exiting the market: If the government deems that the company's product is necessary for the public good, the government can prevent the firm from exiting that market.

Product and Service Knowledge

Perfectly competitive firms have access to the same market information. Each firm is aware of the prices charged by competitors and therefore can't substantially increase its prices, as it will be priced out of the market. Perfectly competitive firms also access the same production techniques and technology, so no firm is able to provide a service or produce goods at a considerably cheaper cost than others. However, a monopolistic firm has exclusive knowledge to which only that firm has access. This kind of knowledge or modes of production come in the form of trademarks, patents and copyrights. These instruments are legally protected, thus denying other firms access.

Effects of the Differences

CliffsNotes.com states, "A monopolist produces less output and sells it at a higher price than a perfectly competitive firm." As a result of this, monopolies have a higher likelihood of earning super-normal profits, as they control the entire market. Perfectly competitive firms can't make super-normal profits: They refrain from exploiting their customers by setting high prices to enjoy high profit margins. Perfectly competitive firms increase their profit margins through efficiency by minimizing wastage of resources and controlling costs.

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About the Author

Alphonse Lameck is a tutorial fellow based in Kenya, where he specializes in the field of management. He holds a Master of Arts in practicing management from McGill University, as well as a bachelor's degree in international business administration from United States International University.