Difference between Perfectly and Imperfectly Competitive Markets - Essay Example

Since the market is fragmented and none has the ability to be better than the other, one firm setting the price too high can lose if other competitors set their prices lower. The price in this setting is Pareto efficient which means that no one can be made better off without making anybody worst off. In the short run, some firms might gain and some lose but in the long run, a perfectly competitive market yields zero profit.  

The scenario is different from an imperfectly competitive market characterized by one or few sellers which gives the firms the ability to influence the pricing strategy. In this case, the customers are price takers as opposed to the perfectly competitive market where firms are price takers. In order to maximize profits, the firm set prices where marginal cost equals marginal revenue. Unlike in the perfectly competitive scenario, firms in imperfect markets have all the advantages of raising prices especially when the price elasticity of demand for customers is less than one.

2. Why will a price-discriminating monopolist earn a greater profit than a normal monopolist? (200 - 250 words)

A price-discriminating monopolist is one who charges different prices to customers according to their willingness to pay. On the other hand, a normal monopolist is one that charges prices where marginal cost intersects marginal revenue. It should be noted that as opposed to a perfectly competitive market, monopolists are free to choose prices in order to maximize profits.

A normal monopolist earns a much greater profit than a price-discriminating one. It should be noted that monopolists gain profit through the deadweight loss which results in not producing at the maximum capacity. This deadweight loss is attained when the price is set such that marginal cost equals marginal revenue. For a price-discriminating monopolist, as the prices are individually charged according to the consumers’ willingness to pay, it will charge prices to the marginal customer similar to the prices and quantity of a perfectly competitive firm. In this way, the deadweight loss is eliminated from the pictures and the profits are not made. It should be noted that price discrimination makes the monopolist a price taker, where it takes the price that an individual customer wants to pay and not as a price maker which it should be as a monopolist.