Perfect Competition vs. Monopoly: Who Really Sets the Price?  

In the real world, the pricing of goods and services can fluctuate wildly due to a plethora of economic and social factors. However, over time, economists have developed various models to simulate real-world pricing but in differing conditions; while there are, of course, multiple models, the two models that occupy opposing ends of the spectrum are the perfect competition model and the monopoly model.  

What is perfect competition?  

In an economy, the concept of perfect competition is a theoretical market structure where many small firms and corporations compete against each other for revenue and sales. While the concept is relatively simple in and of itself, there are several conditions that are necessary to maintain an environment of perfect competition:  

• An excess of both buyers and sellers in order to ensure that no singular individual/corporation can influence prices  
• All firms sell exactly identical products.  
• All buyers and sellers have complete knowledge of pricing and market conditions.  
• No taxes or subsidies – lack of government intervention.   

While it is, of course, close to impossible to replicate this sort of economic environment in the real world, the model does represent what should ideally be occurring within a market. If pricing is entirely determined by the forces of supply and demand, and fluctuates only as public desire to purchase a product or service changes, then things like Deadweight Loss (DWL – social and economic inefficiencies in a market that occur when a non-optimal amount of a service is produced or consumed) and other drains of economic growth are limited as firms are unable to raise prices to extortionate levels.   

Theoretically, this makes every firm within a market a ‘price taker’, meaning that they have to accept the price of a good set by the market and instead have to focus on increasing efficiency and production to turn a greater profit, rather than raising prices. In the long term, the low barriers to entry and competitive environment will entice other firms into entering the market to the point (normal profit), where total revenue equals total cost. where the total revenue equals the total cost. While this idea is not possible in a market as firms would simply stop producing a product if they were not earning a profit, the structure of the model reinforces the key principles of productive efficiency and resource management; productive efficiency and resource management are both ideal for economic growth and advancement, especially when compared to rising prices and costs that could lead to all sorts of economic issues and crises.   

The idea of perfect competition is idealized and is not possible in a real market; however, the focus it places on market efficiency and positive competition is all things which could drive economic progress within an economy and should be focused on regardless of the flaws the idea of perfect competition has.   

Monopolies and their issues  

In a monopoly, in direct contrast to the concept of perfect competition mentioned above, there is only one firm that is able to provide a good or service to a market. This means that said firm has no competition and therefore becomes a ‘price maker’ rather than a ‘price taker’ as mentioned above.   

Monopolies typically appear in industries that have very high capital requirements to start making profits and a large number of barriers to entry, such as excessive government regulations and controls. In a monopoly (that has a negative impact on an economy), corporations often set prices above the ideal/efficient level for an economy and at a level where the marginal cost to society is greater than the marginal benefit to society; hence, deadweight loss can begin to appear in a market. Furthermore, monopolies can lead to a lack of innovation and advancement as there is no pressure on the corporation to develop better and more efficient technologies, again causing a stagnation in economic growth.   

Where does the balance lie?  

Both of the examples above are extremes that are theoretically possible in market structures but do not often appear in reality. The ideal for a market lies somewhere in between these two models in some form of an oligopoly (when a market has competition but only from a few large producers) or a structure of monopolistic competition (when there are various firms offering differentiated products).  

In a perfect competition model, there is an excess of competition, which can lead to low profits and therefore minimal innovation due to a lack of motivation and capital investment into R&D, potentially limiting economic growth. Similarly, in a monopoly, the lack of competition reduces output and quality, and again reduces the desire to innovate and outcompete other corporations. This leads us to the conclusion that the best market structure for growth is one where: firms offer differing products, which would lead to more competition and innovation; moderate barriers to entry exist to prevent an excess of producers and maintain profit as an incentive; and market dynamics are varied enough to ensure pricing is never set over the level of marginal cost for too long in order to minimise inefficiencies in society.