Monopolistic Competition vs "perfect" competition

[mlwl8521]

Having trouble understanding the difference between the two. I ran into a question about monopolistic competition and looked up the wikipedia entry. hallmark characteristics supposedly include:
1. low/minimal barriers to entry
2. price setting (where in perfect competition there is price taking)
3. marketing or physical differentiation in the products
So let’ take something like Gatorade. Would that be monopolistic competition (because of differences between that and Powerade) or perfect competition because anyone can go out and create/market their own sports drink without controlling the market price?
Or is “perfect competition” usually reserved for something commoditized such as copper or oil?
Would “rice” sales fall under monopolistic competition or perfect competition? For example, could one rice/milk/wheat farmer claim that his rice is better than the rest or does it not work like that?

 

[geo]

IMO the best way to look at the difference is MC has differentiated products and PC has easily substituted products (commodities). MC competes on product characteristics, PC competes on price.
You don’t go to the French food restaurant because its cheaper than Curry-in-a-hurry, but because you want that food. That’s MC. Buying your gas at Shell instead of Huskey would be PC. Le Chez Geo can also adjust prices somewhat without impacting demand. Shell gas station cannot, any price change has a huge impact on demand instantly.

 

[S2000magician]

mlwl8521 wrote:Having trouble understanding the difference between the two. I ran into a question about monopolistic competition and looked up the wikipedia entry. hallmark characteristics supposedly include:
1. low/minimal barriers to entry
2. price setting (where in perfect competition there is price taking)
3. marketing or physical differentiation in the products
So let’ take something like Gatorade. Would that be monopolistic competition (because of differences between that and Powerade) or perfect competition because anyone can go out and create/market their own sports drink without controlling the market price?
Or is “perfect competition” usually reserved for something commoditized such as copper or oil?
Would “rice” sales fall under monopolistic competition or perfect competition? For example, could one rice/milk/wheat farmer claim that his rice is better than the rest or does it not work like that?

A relatively simple test (not perfect, but pretty good) is to see whether the product id advertized or not: advertizing suggests monopolistic competition while lack of advertizing suggests pure competition.
Gatorade’s in a monopolistically competitive market. Generic rice is in (more of) a purely competitive market.

 

[mlwl8521]

Thanks both of you
Geo - So for Exxon vs Shell (we don’t have Huskey in the USA I think), you consider it to be perfect competition that is dictated by price (instead of by marketing and advertising).
What about printer paper (the kind that you buy at retail locations like OfficeDepot)?

 

[S2000magician]

mlwl8521 wrote:Thanks both of you

My pleasure.

mlwl8521 wrote:Geo - So for Exxon vs Shell (we don’t have Huskey in the USA I think), you consider it to be perfect competition that is dictated by price (instead of by marketing and advertising).

Not to preempt Geo, but I’d say it’s closest to perfect competition, but there’s still a slight element of differentiation there; note that Exxon and Shell advertise.

mlwl8521 wrote:What about printer paper (the kind that you buy at retail locations like OfficeDepot)?

Closest to perfect competition: paper’s paper.

 

[geo]

Yeah, it’d have to be plain Jane gasoline and not premium additives and cleaners and stuff. I guess that differentiates. But the price action on demand for gas stations is illustrative.

 

[mlwl8521]

Thanks, this clears things up.
Hopefully the actual CFA exam won’t throw any curveballs like that.

 

[S2000magician]

mlwl8521 wrote:Thanks, this clears things up.

Good to hear.

mlwl8521 wrote:Hopefully the actual CFA exam won’t throw any curveballs like that.

CFA Institute doesn’t throw curveballs on the exams.
Sliders and knuckleballs, mostly.