Which of the following is different about perfect competition and monopolistic competition? a. In monopolistic competition, entry into the industry is unblocked. b. Firms in monopolistic competition compete on their product’s price as well as its quality and marketing. c. Perfect competition has a large number of independently acting sellers. d. Only firms in monopolistic competition can earn an economic profit in the short run
Which of the following is different about perfect competition and monopolistic competition?
a.
In monopolistic competition, entry into the industry is unblocked.
b.
Firms in monopolistic competition compete on their product’s price as well as its quality and marketing.
c.
Perfect competition has a large number of independently acting sellers.
d.
Only firms in monopolistic competition can earn an economic profit in the short run
The Correct Answer and Explanation is:
Correct Answer: b. Firms in monopolistic competition compete on their product’s price as well as its quality and marketing.
Explanation
The key difference between perfect competition and monopolistic competition lies in the nature of the product and the basis on which firms compete.
In perfect competition, all firms sell identical (homogeneous) products. This means there is no distinction between products offered by different sellers. As a result, the only factor firms compete on is price. Since buyers see no difference between products, they will always buy from the seller offering the lowest price, assuming equal access.
In contrast, monopolistic competition involves firms selling differentiated products. These differences can be real (such as design, quality, and features) or perceived (through branding and marketing). Thus, firms in monopolistic competition compete not just on price, but also on product quality, brand image, customer service, and advertising. This differentiation allows firms to have some degree of market power, enabling them to set prices above marginal cost in the short run.
Now, looking at the other choices:
- (a) is incorrect because entry into both perfect and monopolistic competition markets is generally unblocked or free, meaning there are no significant barriers to entry or exit in the long run.
- (c) is incorrect because both market structures involve a large number of independent sellers.
- (d) is incorrect because firms in both market structures can earn economic profit in the short run. However, in the long run, due to free entry and exit, economic profits tend to be driven to zero in both.
Therefore, the main distinguishing feature is that in monopolistic competition, firms engage in non-price competition—through product differentiation, marketing, and quality—which is not a feature of perfect competition. This makes option (b) the correct and most accurate answer.
