Question

Compare the advantages and disadvantages of perfect competition and monopolistic competition in terms of how they benefit society.

Answer 1

Perfect competition/contestable market is price taker and has similar and identical goods and is easy to enter and easy to exit.

Perfect competition has normal profits in the long run as entry and exit is difficult. It also ensures allocative and productive efficiency.

Social welfare is achieved when. productive and allocative efficiencies are achieved. It only happens in perfect competition.

Imperfect markets like monopoly, oligopoly and monopolistic markets find it moderately or extremely difficult to enter and exit.

A monopolistic market is a market where there are many sellers. Each seller claims to have a differentiated product. Eg. car sellers.

In this markets entry and exit is moderately difficult as each company has created a kind of market for their own products. Unlike perfect competition they are price makers and may charge own price.

Monopolistic competition also has normal profits in the long run. This happens due to entry and exit of firms. If any firm makes abnormal profits then other firm enter and decrease the price charged and get normal profits. Also when firms make loss then a few firms will exit and as supply goes down, prices will start going up and in the long run only normal profit is made.

Advantages and disadvantages of perfect competition.:

Advantages:1. same type of product .2. prices are same in the market hence no confusion about pricing. 3. Free entry and exit 4. Normal profits win the long run and hence no customer exploitation.

Disadvantages: 1. No variety . 2. very less investments in research and developments of new products. 3. As many firms exist there are no economies of scale.

Advantages and disadvantages of monopolistic competition.:

Advantages:1. Very differentiated types of product .2. Intense competition leads to variety of products. 3. moderate entry and exit challenges. 4. Normal profits in the long run.

Disadvantages: 1. Firms can create niche and then charge higher prices. 2. very high investments in research and developments and prices are then passed on to customers.3. brand loyalty may make customers pay higher. 4. High advertising expenses.