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A perfect market or perfect competition is a market situation where neither the sellers nor buyers, have the market power to influence the prices of goods and services. In such a market, identical goods are sold at a common price (Roberts, p. 212).
There are specific characteristics of a perfectly competitive market and they include:
- Homogeneous Goods: Identical goods present price differentiation.
- Adequate Information: Consumers and producers are assumed to have enough information about the market conditions particularly the price prevailing in the market.
- Free Entry and Exit: Manufacturers, buyers, and sellers find it relatively easy entering or leaving the market.
An imperfect market or monopolistic competition exists when either the sellers or buyers have sufficient control to influence the prices of goods and services. An imperfect market deals in differentiated products (Nicholson, p. 547)
The characteristics of an imperfect market are as follows:
- No free entry and exit.
- Supply and demand are elastic due to few sellers and buyers.
- Goods sold in the market are usually heterogeneous.
Comparing both models
- Both markets can make excess profits in the short run (Roberts, p. 244).
- Both maximize profit at the output level where marginal cost (MC) equals marginal revenue (MR)
- Product differentiation takes place in a monopolistic competition but does not exist under perfect competition.
- Monopolistic competition depicts a real-world market situation whereas perfect competition is an ideal market situation that rarely exists in reality.
- Both markets face the same competitive market factors.
Examples of markets that are close to both models
Industries that are close to perfect competition are: (Nicholson, p. 642).
- Stock exchange
- Free software
- Fruit and vegetable vendors
- Fish vendors
Industries close to monopolistic competition are:
Advantages and disadvantages of perfect and monopolistic models
Advantages of perfect competition include the following: (Smith, p. 49).
- Lack of Scarcity: There is no scarcity because of the availability of many producers.
- Low prices: Consumers are charged low for goods because of the availability of the same goods.
- Efficiency: Competition amongst sellers encourages efficiency.
- Information: The adequate information available enables consumers to know the prices of goods.
Disadvantages of perfect competition:
- Wastage: There is a lot of wastage because of the availability of many goods.
- Insufficient funds: There is a lack of funds for investment due to the low prices charged to consumers.
- Variety: The homogenous nature of the market discourages products or goods variety.
- Design and specification: There is a lack of competition over product specification and design.
Advantages of a monopolistic competition:
- It prevents over-production: This is a result of the fact that the sole producer studies the market demand before embarking on production.
- It prevents waste: The type of wastage experienced in a perfectively competitive market is greatly avoided in a monopolistic situation because production is done according to demand.
- Good use of resources: Raw materials equipment and factors of production are put to effective use.
- Leads to the invention: People carry out researches that lead to the discovery of new products to enjoy patent laws.
Disadvantages of monopolistic competition: (Smith, p. 55).
- It increases the cost of goods: The monopolist being the sole producer sells his goods at exorbitant prices to make fantastic profits.
- Consumers bear the brunt: Consumers are always at the mercy of the exploitative propensities of the monopolist.
- Artificial scarcity: Monopolists deliberately reduce supply to cause artificial scarcity and make fantastic profits.
- Results into inflation: The immediate result of a reduction in Supply and eventual scarcity of goods is inflation.
- Nicholson, Walter. The economics of competitive markets, Microeconomics Theory: New York and Oxford: Oxford University press. 2005. Print.
- Roberts, Paul. Theory of production, a long period Analysis: Stanford: Standard University press. 2007. Print.
- Smith, Victors. “Economic Theory.” Allocation of economic resources: 1995. Web.