Monopoly

Monopolistic competition
Somewhere between PERFECT COMPETITION and MONOPOLY, also known as imperfect competition. It describes many real-world markets. Perfectly competitive markets are extremely rare, and few FIRMS enjoy a pure monopoly; OLIGOPOLY is more common. In monopolistic competition, there are fewer firms than in a perfectly competitive market and each can differentiate its products from the rest somewhat, perhaps by ADVERTISING or through small differences in design. These small differences form BARRIERS TO ENTRY. As a result, firms can earn some excess profits, although not as much as a pure monopoly, without a new entrant being able to reduce PRICES through COMPETITION. Prices are higher and OUTPUT lower than under perfect competition.

Monopoly
When the production of a good or service with no close substitutes is carried out by a single firm with the MARKET POWER to decide the PRICE of its OUTPUT. Contrast with PERFECT COMPETITION, in which no single firm can affect the price of what it produces. Typically, a monopoly will produce less, at a higher price, than would be the case for the entire market under perfect competition. It decides its price by calculating the quantity of output at which its MARGINAL revenue would equal its marginal cost, and then sets whatever price would enable it to sell exactly that quantity.

In practice, few monopolies are absolute, and their power to set prices or limit SUPPLY is constrained by some actual or potential near-competitors (see MONOPOLISTIC COMPETITION). An extreme case of this occurs when a single firm dominates a market but has no pricing power because it is in a CONTESTABLE MARKET; that is if it does not operate efficiently, a more efficient rival firm will take its entire market away. ANTITRUST policy can curb monopoly power by encouraging COMPETITION or, when there is a NATURAL MONOPOLY and thus competition would be inefficient, through REGULATION of prices. Furthermore, the mere possibility of ­antitrust action may encourage a monopoly to self-regulate its behaviour, simply to avoid the trouble an investigation would bring.

Monopsony
A market dominated by a single buyer. A monopsonist has the MARKET POWER to set the PRICE of whatever it is buying (from raw materials to LABOUR). Under PERFECT COMPETITION, by contrast, no individual buyer is big enough to affect the market price of anything.