Introduction

There are different types of market structures in the business world. It is said that most of the market structure in the world is similar to that of monopolistic competition. Another two different market structure from the extreme include: monopoly and perfect competition market structure. In this article, the long run equilibrium positions that prevail in monopoly and perfectly competitive industry will be compared.

Defining a Monopoly Industry

A monopoly situation exists whenever a firm can exert huge control over the products or services and hence the pricing of that products in the marketplace. Such a situation happen when the firm able to gain greater market share in a persistent manner in marketplace, as contrast to what is expected under the scenario of perfect competition. A firm with monopoly power is able to produce fewer goods, and then to sell those goods at a higher price to the market (Glick & Ehrbar, 1990; Samuelson et. al., 2005).

The characteristics of a monopoly industry are as follow: (a) there is only a single seller producing all of the goods for the market, (b) the firm with the monopoly situation has the market power to set the market prices, (c) the firm is the industry itself, and (d) the firm can change the price as well as the quality of the products, and to implement price discrimination upon the market if that is profitable (Chen & Frank, 2004; Samuelson et. al., 2005; McGuigan et. al., 2002).

Defining Perfectly Competitive Industry

Under the perfect competition environment, all the firms operating in the industry are price takers. Thus, they do not have the market power to price their products or services, but rather to accept the market prices (Samuelson et. al., 2005). There are several conditions to be fulfilled for the perfectly competitive market to exist. Firstly, all of the suppliers or firms in the market have insignificant market shares. Besides, the firms all supply homogeneous and standardized products to the market. Thirdly, the consumers have perfect information. As such, the consumers understand the prices charged and will buy from the lowest pricing suppliers. Apart from that, in a perfect competition industry, all of the firms have equal access to resources, be it technological, financial or others (Glick & Ehrbar, 1990).

Long-Run Equilibrium of Monopoly & Perfectly Competitive Industry

In this section, the long run equilibrium positions of the monopoly and perfectly competitive industry will be compared and contrasted.

In the long run equilibrium, the market prices of goods under the perfectly competitive industry is the price resulted from the intersection of demand and supply of a particular market. Under such condition, the firms operating in the industry are price takers, and can only sell the company’s products at the market price. However, for firm operating in the monopoly industry, the firm can set the market price. Thus, the price in the long run equilibrium under the monopoly industry is set by the firm. Thus, the monopoly firm is a price maker (Gwartney et. al., 2003). The prices of goods under monopoly industry, in the long run equilibrium situation, are determined by the firm based on his business strategy and preferences, but not at the intersection of demand and supply in the marketplace (Amit, 1981; Silbiger, 2005; Samuelson et. al., 2005).

In the long run equilibrium condition, the market price for a perfectly competitive industry is equal to the industry wide marginal revenue. This means none of the firms operating in the perfectly competitive industry able to earn economic profit. In contrast, the marginal revenue for the firm in monopoly industry is lower than the market price. The firm enjoys economic profit even under the long run equilibrium situations (Gwartney et. al., 2003; McGuigan et. al., 2002).

In the long run, the perfectly competitive market consists of many, or infinite amount of buyers and sellers. However, there is only a single seller in the monopoly situation. This means that monopoly firm does not have competitors in the industry (Samuelson et. al., 2005).

In the long term, the price elasticity of demand for a monopoly firm is relatively inelastic. In other words, the coefficient of elasticity is low. In contrast, the price elasticity of demand for firms operating in the perfectly competitive industry is elastic. This means that the coefficient of the elasticity is infinite (Glick & Ehrbar, 1990; Silbiger, 2005).

In the long run equilibrium, the firms operating in a perfectly competitive industry are not able to attain economic profit, or higher than average expected return on investments. The competitors may enter the industry freely, driving down the economic profits in the long run. In contrast, firm in the monopoly industry can enjoy long term economic profit. The margin of firms in the industry remains high due to lack of competition (possibly because high barriers to entry) (Silbiger, 2005; Samuelson et. al., 2005; Gwartney et. al., 2003).

In the long run equilibrium, the firm operating in monopoly industry faces a downward sloping demand curve. In contrast, the firms in perfectly competitive industry face a flat demand curve. As such, a firm operating in perfectly competitive industry can only maximize profit by producing to the extent that price is equals to marginal costs. In contrast, the firm in monopoly industry can produce to the extent that marginal revenue equals to the marginal costs in order to maximize profits (Silbiger, 2005; Samuelson et. al., 2005).

Although in the long run equilibrium, there are many differences between perfectly competitive and monopoly industry, there are some similarities as well. For example, it is observed that the costs functions in both industries are similar. No matter where the firms operate, they are expected to minimize costs. Secondly, all of the firms are expected to maximize profits (Samuelson et. al., 2005; McGuigan et. al., 2002).

Conclusion

Both monopoly and perfectly competitive industry structure lead to different impacts to the firm/ firms operating in the industry as well as the society. In efficient economic system, perfectly competitive industry can benefit the society, as the price is kept to the lowest. On the other hand, deadweight loss will occur in a monopoly industry. Overall, the society can benefit more from a perfectly competitive industry (Tse, 2000; Glick & Ehrbar, 1990).

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