One difference between monopolistic competition and pure competition is that: A)

Question

One difference between monopolistic competition and pure competition is that:
A) There is some control over price in monopolistic competition

B)   Products may be homogeneous in monopolistic competition
C)   Monopolistic competition has significant barriers to entry
D)   Firms differentiate their products in pure competition

One difference between monopolistic competition and pure competition is that:
A) There is some control over price in monopolistic competition

B)   Products may be homogeneous in monopolistic competition
C)   Monopolistic competition has significant barriers to entry
D)   Firms differentiate their products in pure competition

Explanation / Answer

Monopolistic Competition
A type of competition within an industry where:

1. All firms produce similar yet not perfectly substitutable products.
2. All firms are able to enter the industry if the profits are attractive.
3. All firms are profit maximizers.
4. All firms have some market power, which means none are price takers.

Monopolistic competition differs from perfect competition in that production does not take place at the lowest possible cost. Because of this, firms are left with excess production capacity. This market concept was developed by Chamberlain (USA) and Robinson (Great Britain).

Perfect Competition
A market structure in which the following five criteria are met:

1. All firms sell an identical product.
2. All firms are price takers.
3. All firms have a relatively small market share.
4. Buyers know the nature of the product being sold and the prices charged by each firm.
5. The industry is characterized by freedom of entry and exit.

Sometimes referred to as "pure competition". Perfect competition is a theoretical market structure. It is primarily used as a benchmark against which other market structures are compared. The industry that best reflects perfect competition in real life is the agricultural industry.

A) There is some control over price in monopolistic competition

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