Imperfect Competition: Forms, Advantages and Disadvantages

When one of the requirements for a market to be totally competitive is not satisfied, imperfect competition develops. This kind of market is rather prevalent. In fact, imperfect competition exists in every sector. 

 

The market has a variety of goods and services, prices that aren't determined by supply and demand, there's rivalry for market share, customers might not be fully informed about the goods and pricing, and there are significant obstacles to entry and departure.

 

Market structures such as monopolies, oligopolies, monopolistic competition, monopsonies, and oligopsonies can all exhibit imperfect competition. There is only one (dominant) vendor in monopolies. That business provides a product to the market that is unique. 

 

Monopolies feature significant entry barriers and one price-setting vendor. This means that regardless of supply or demand, the company determines the price at which its product will be sold. Finally, the business has the right to modify prices whenever it wants, without prior warning to customers.

 

There are many buyers but a small number of vendors in an oligopoly. Examples of oligopolies include the oil and grocery industries, the smartphone industry, and the tyre industry. 

 

Because a small number of businesses dominate the market, they could prevent others from breaking into the sector. In this market arrangement, businesses determine pricing for goods and services collectively or, in a cartel, individually if one takes the initiative.

 

When there are several vendors selling comparable but non-substitutable goods, monopolistic competition takes place. The general business actions of one firm do not affect its competitors, despite the fact that entry barriers are minimal and the businesses in this structure set prices. 

 

Examples include fast food establishments like McDonald's and Burger King. Although they are in direct rivalry, they provide identical items that cannot be substituted—think Big Mac vs. Whopper.

 

Also Read | Pricing Strategies

 

What is Imperfect Competition?

 

When a market, whether it be hypothetical or actual, deviates from the idealized principles of neoclassical perfect competition, imperfect competition is present. Companies in this economy compete for market share, sell a variety of goods and services, determine their own pricing, and are frequently protected by obstacles to entry and departure.

 

Any economic market that does not adhere to the strict presumptions of a hypothetical perfectly competitive market is said to have imperfect competition. Companies in this economy compete for market share, sell a variety of goods and services, determine their own pricing, and are frequently protected by obstacles to entry and departure.

 

The following forms of market systems exhibit imperfect competition frequently: monopolies, oligopolies, monopolistic competition, monopsonies, and oligopsonies.

 

Although economists generally concur that perfect competition is improbable in real-world markets, they disagree on the extent to which this affects market outcomes.

 

The opposites of monopolies and oligopolies are monopsonies and oligopsonies. These distinct marketplaces feature numerous vendors but few customers, as opposed to many buyers and few sellers. Numerous businesses produce goods and services with the intention of selling them to the U.S. military, which is a monopsony. The tobacco business is an illustration of an oligopoly.

 

Less than five businesses buy almost all of the tobacco produced worldwide, which is then used to make cigarettes and smokeless tobacco products. The buyer, not the supplier, can control market pricing in a monopsony or an oligopsony by pitting companies against one another.

 

Relation between Perfect and Imperfect Competition

 

In order to make the theories of consumer and producer behavior, supply and demand, and market price determination mathematically tractable so that they can be accurately defined and explained, perfect competition is a set of assumptions used in microeconomics. 

 

It is occasionally used as a benchmark to assess the efficacy and efficiency of actual markets in welfare economics and applied economics for public policy.

 

The following conditions must be satisfied for the ideal competitive environment:

 

1. Businesses market similar goods without any product distinction.

 

2. The market has enough buyers and sellers so no corporation can control the price it sets, and customers alone choose the price they are prepared to pay for any business.

 

3. Information on past, current, and future circumstances, desires, and technology is freely available to all market players and potential participants.

 

4. It is possible to do any transaction for free.

 

5. Companies don't have to pay anything to enter or leave the market.

 

It is instantly clear that, with possibly a few notable exceptions, such as sellers at a flea market or farmer's market, very few companies in the actual world conduct business in this manner. 

 

Competition is described as imperfect if and when the aforementioned pressures are not satisfied because differentiation gives some businesses an edge over others and allows them to outperform peers in terms of profit, often at the price of customers.

 

Imperfect competition gives possibilities to make additional profit, unlike in a perfect competition setting, when enterprises earn just enough to keep alive. 

 

Companies compete for market share in an environment of imperfect competition where they provide a variety of goods and services, determine their own pricing, and are frequently shielded by obstacles to entrance and departure, making it more difficult for upstart businesses to compete. 

 

The following forms of market structures: monopolies, oligopolies, monopolistic competition, monopsonies, and oligopsonies all exhibit imperfect competitive markets to varying degrees.

 

Also Read | Guide to Perfect and Imperfect Competition

 

Forms of Imperfect Competition

 

In economic theory, imperfect competition is a type of market structure that illustrates some, but not all, characteristics of competitive marketplaces.

 

A few examples of imperfect competition are:

 

1. Monopolistic competition: It occurs when several businesses contend with slightly distinct items. Although the manufacturing costs are higher than what fully competitive businesses can accomplish, society gains from the uniqueness of the items.

 

2. Monopoly: An organization with no competitors in its industry. A monopolistic business would produce less, incur more expenses, and charge more for its goods than it would if it were subject to price competition. Such unfavorable consequences force widespread government monitoring.

 

3. Oligopoly: A market with an oligopoly has a small number of competitors. Similar to how a monopoly reduces output and increases profits, they establish a cartel. It comprises duopoly, a specific kind of oligopoly with just two businesses in one industry.

 

4. Monopsony: A market with only one buyer and several sellers.

 

5. Oligopsony: A market known as an oligopoly has numerous vendors but few purchasers.

 

Imperfect Competition Market Structures

 

The absence of competing providers is most frequently a defining feature of market systems that effectively impair competition. High entrance barriers for new providers can result in imperfect competition. For instance, due to the prohibitively expensive cost of planes, the aviation business has substantial entry barriers.

 

When there is just one supplier in the market for a certain commodity or service, it is considered to be the most extreme case of imperfect competition. In essence, a provider that holds a monopoly on the delivery of an item or service has total control over prices.

 

The lone provider is effectively free to set the price of its goods or services at any level it chooses because it has no competition from other suppliers. Monopolies frequently impose pricing that provide them much bigger profit margins than the majority of businesses do.

 

A market arrangement known as a duopoly has just two providers. Duopolies are a little more competitive than monopolies, but they are still far from ideal since the two providers still have a lot of influence on market pricing.

 

The detergent market in the United Kingdom, where Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL) are essentially the only suppliers, is an example of a duopoly. In a duopoly, the two suppliers frequently cooperate to establish prices.

 

Monopolies and duopolies are far less frequent than oligopolies. There are several providers in an oligopoly, but they are few and few in number. 

 

As it is mainly controlled by a small number of suppliers, the mobile phone service industry in the United States is an illustration of an oligopoly. Due to the limited number of providers, which restricts customers' purchasing options, the suppliers have significant, albeit not total, control on pricing.

 

A monopsony is a rare type of imperfect competition. A monopsony occurs when there is just one buyer who has significant power over market prices, as opposed to any suppliers. Governmental organizations frequently have a monopoly position.

 

For instance, the only buyer of certain military weapons in every nation is often the central government. Even though there may be several producers supplying these products, the prices that each supplier is ready to accept are essentially determined by what the government is willing to pay.

 

Advantages and Disadvantages of Imperfect Competition

 

Advantages of Imperfect Competition

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Advantages of Imperfect Competition

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Some of the main advantages of imperfect competition are:

 

1. It allows for the imposition of a greater price on the goods, which increases profits.

 

2. To minimize competition, barriers are built to keep rival businesses out of the market.

 

3. Companies that have to compete with one another are more profitable.

 

4. Since they can agree on prices and places, they may be able to share items on the market.

 

5. Due to the lack of competition, they have a significant effect on the market and generate enormous profits for their businesses and economies.

 

Disadvantages of Imperfect Competition

 

In an ideal market, all vendors must provide the same products to the same customers, who are equally knowledgeable, at the same rates. In perfect competition, there is no place for branding, product distinction, promotion, or innovation.

 

The qualities of a completely competitive market are impossible for any genuine market to achieve. The restricted use of physical capital and capital investment, entrepreneurial activity, and changes in the availability of scarce resources are only a few of the aspects that the pure competition model ignores.

 

The following can be listed as drawbacks of imperfect competition:

 

1. Because of its pricing in the market, it is a sort of economy in which the government continuously intervenes.

 

2. Prices that grow too quickly risk driving away customers, which would lead to the product's failure on the market.

 

3. To increase demand, businesses must cooperate.

 

4. As there are few sellers and everyone is familiar with the goods, there is rivalry among them.

 

Imperfect competition is a concept used in economics to describe market features that prevent a market from being fully competitive, leading to market inefficiencies and financial losses. 

 

Perfect competition refers to a market having several suppliers of equal or nearly identical goods or services. Imperfect market structures include monopolies, duopolies, oligopolies, and monopsonies.