What is Imperfect Competition?
Imperfect Competition can be described as a practical market setting where the individual sellers can influence the price of the offerings. However, it does not imply that they have full-fledged control over the prices and the absence of rivals, but the control is possible up to a certain extent.
Further, the extent of control over the price varies from one industry to another. That is why imperfectly competitive firms are regarded as ‘price makers.
Table of Contents
Characteristics of Imperfect Competition
Such a market is characterised by:
- Few firms
- Homogenous or differentiated products
- Lack of knowledge
- Barriers to entry
Imperfect competition often results in a rise in the prices above the cost, and consumer purchases decrease below the efficient level, as there is no compulsion on the firm to produce the output at the lowest average cost. And in this way, they have a certain degree of control over the price and supply of the offerings.
So, in imperfect competition, the firms are likely to make abnormal profits. The term ‘abnormal profit’, or ‘super profit’, means the profit over and above the normal profit.
Demand Curve Under Imperfect Competition
As you can see in the figure, the demand curve slopes downward as the price increases, leading to a decrease in sales. And except when it is the only monopolist, if the prices of rivals are slashed, it will considerably shift its own demand curve from d’ to d.
Further, it also reflects that when an imperfectly competitive firm increases its sales. Resultantly, there will be a reduction in the market price of the commodity as it moves down its demand curve.
Sources of Imperfect Competition
- Cost and Market Imperfection: The cost structure and technology are the two determinants which decide the number of firms that the industry can support and how big the firms will be. Further, if there is a scope for economies of scale, then big enterprises have the edge over the smaller ones. Consequently, the Average Cost curve tends to decline until a large number of outputs are produced.
- Barriers to entry: Such competition prevails due to the barrier to entry of the new firms, which is created by several factors like high entry cost, licensing policy, patenting of rights, advertising and product differentiation, legal restriction, etc.
- Ownership of key factors of production: When a large firm owns most of the industry inputs, then also it will result in imperfect competition.
At present, the maximum markets for goods and services are imperfect ones.
Types of Imperfect Market
The imperfect market is classified into four categories, explained as under:
Monopoly
A market scenario in which a sole producer has control over the entire market, as the producer offer such a product with no similar or close substitutes. Monopoly is an example of extreme imperfection.
Salient features of Monopoly
- Single seller
- Absence of substitutes
- Barrier to entry
- Limited information
Duopoly
A market setting in which two monopolists share their power of monopoly is Duopoly. In other words, in a duopoly, there are two sellers for the product. It can be:
- Duopoly with product differentiation: The producer firm will have its own loyal customers, and the price war between them will not exist.
- Duopoly without product differentiation: In this situation, there is a similarity in the offering, and so they may have an agreement with respect to the prices and divide the market. In the absence of any agreement concerning the price, there would be a uniform price for output, and firms could earn normal profits.
Oligopoly
A form of imperfect competition in which the number of sellers offering the product (homogeneous or heterogeneous) is few.
The term is of Greek origin which is a combination of two words, “oligoi” and “poly”, which means ‘few’ and ‘control’ respectively. Hence, it refers to a type of market which is controlled by a few firms only. The aviation industry is one of the classic examples of this type of market.
Salient features of Oligopoly
- Few sellers
- Identical or differentiated products
- Enhanced role of government
- Mutual interdependence
- Price rigidity
Monopolistic Competition
In monopolistic competition, numerous sellers offer dissimilar products for sale to customers. It symbolizes a highly pragmatic situation which exists in the real world. As the number of players is quite large in the industry, each firm enjoys independence.
Salient features of Monopolistic Competition
- A large number of buyers and sellers
- Product differentiation
- Easy entry and exit
- Restricted mobility
- Price control policy
Wrap Up
Therefore, in imperfect competition, the firm experiences a downward-sloping demand curve, which means that a larger quantity of the product can be sold only when it reduces the price of the product.