Understanding Imperfect Competition
Imperfect competition refers to a market structure where the conditions that are necessary for perfect competitive market (like many buyers and sellers, homogeneous products and easy market entry and exit) are not fully met. It describes a market environment where vendors sell heterogeneous products. Imperfect competition further lead to market inefficiency and can also cause market failure.
Firms in imperfectly competitive markets can set prices higher than in perfectly competitive markets due to their market power. These markets may not be as efficient as perfectly competitive markets, which can result in increase in pricing but with reduced output.
Types of Imperfect Competition
Monopolistic Competition:
- It refers to a market structure with many firms that sell similar but not identical products.
- Each firm has some control over its prices due to product differentiation.
Monopoly:
- When a single company is the only supplier of a particular product or service, with no competition.
- In a monopoly, the company often produces less than what would be produced in a competitive market, that further leads to assigning higher production costs and charging higher prices for its product.
- As a result, government oversight is usually required to regulate and prevent potential negative impacts on consumers and the market.
Oliogopoly:
- A market structure dominated by a small number of large firms, each of which can influence market prices and output. These firms may engage in competitive or collusive behavior to limit production and increase profits similar to a monopoly.
- A specific type of oligopoly is a duopoly, where just two firms dominate the entire industry.
Monopsony:
- A market where there is only one buyer and many sellers.
Oligopsony:
- A market where there are a few buyers and many sellers.
Causes of Imperfect Competition
- Collusion
- Firms may work together to fix prices, limit production, or divide markets, thus reducing competition and increasing their market power.
- Product Differentiation
- When companies offer products that are not identical, they create variations that allow them to set different prices and attract specific customer segments.
- Monopoly Control
- Strong brand identities can make it difficult for new competitors to attract customers, limiting the level of competition.
- Market Power
- Firms with significant control over prices or production levels can influence market conditions and reduce competition. This often occurs in monopolies and oligopolies.
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