Monopoly vs. Monopolistic Competition — What's the Difference?

Monopoly and Monopolistic Competition are two distinct market structures that exhibit unique characteristics. In a Monopoly, there is only one firm that dominates the entire market, and it sets the price of the product or service. This firm faces no competition, and consumers have no choice but to purchase from this single provider. In contrast, Monopolistic Competition involves several firms that compete against each other. However, the products they offer are not perfect substitutes; they are differentiated in some way.

While a Monopoly enjoys the luxury of being the sole provider and has significant market power, it also bears the burden of meeting the entire market's demand. In a Monopolistic Competition, firms have some degree of market power because of the differentiated nature of their products, allowing them to set prices to an extent. However, they also face competition from other firms in the market, which can influence pricing and market share.

Another important distinction is the barriers to entry. In a Monopoly, barriers to entry are typically high, preventing other firms from entering the market. In contrast, Monopolistic Competition usually has low barriers to entry, which means new firms can enter the market and compete, further diversifying product offerings.

It's crucial to note the consumer's perspective in these two market structures. In a Monopoly, the consumer has no alternatives available and is subject to the price set by the monopolist. In Monopolistic Competition, consumers can choose between various products, each with its unique attributes, and prices may vary based on these differentiations.