Definition of ‘Imperfect Competition’

Introduction

A competitive market situation with several sellers is known as imperfect competition. However, in contrast to the ideal competitive market situation, they sell heterogeneous (dissimilar) items in imperfectly competitive markets, as the term implies.

What is the definition of imperfect competition?

Imperfect competition is a term used in economics to describe market characteristics that make a market less than completely competitive, resulting in market inefficiencies and economic value losses. In contrast to the perfect competitive market scenario, imperfect competition is a competitive market setting in which there are many vendors selling heterogeneous (dissimilar) commodities. Competitive markets that are imperfect in nature, as the name implies. Real-world competition is imperfect competition. Today, it is used by several sectors and sellers to make extra money. The seller in this market scenario has the luxury of altering the price in order to increase earnings. If a seller is selling a different product on the market, he might boost the price and profit. High profits encourage new vendors to join the market, while sellers who are losing money can easily depart it. In the actual world, markets are almost always subject to imperfect competition to some degree. However, the term is usually reserved for marketplaces in which the level of seller rivalry is far lower than optimum. When one of the key features of perfect competition is missing, a situation of imperfect competition arises. Prices are principally controlled by the standard economic dynamics of supply and demand in a market with perfect competition. Notably, the stock market is seen as a constantly imperfect market because not all investors have equal access to information about potential investments. When a market structure is in the form of monopolies, duopolies, oligopolies, or monopsonies, imperfect competition is widespread (very rare).

Market Structures with Imperfect Competition

A dearth of competing suppliers is typically a defining feature of market systems that effectively render competition imperfect. As a result of excessively high barriers to entry for new suppliers, imperfect competition is common. Because of the extremely high cost of planes, the airline industry, for example, has substantial entry barriers. When a market for a specific commodity or service is a monopoly, with only one supplier, it is the most extreme form of imperfect competition. A supplier with a monopoly on the supply of an item or service has practically complete price control. Because there are no other suppliers to compete with, the only supplier can virtually set the price of its goods or services at whatever level it wants. Monopolies frequently set pricing that gives them much bigger profit margins than most businesses. A market arrangement in which there are just two suppliers is known as a duopoly. Although duopolies are more competitive than monopolies, the amount of competition is still far from ideal, as the two suppliers retain significant price power in the marketplace. Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL) are almost the only suppliers in the UK's detergent market, which is an example of a duopoly. In a duopoly, the two suppliers frequently work together to set prices. Monopolies and duopolies are far less common than oligopolies. There are multiple – but a small, limited number – of suppliers in an oligopoly. The mobile phone service market in the United States is an example of an oligopoly, as it is dominated by a small number of suppliers. Due to the restricted number of suppliers, which limits consumer purchasing options, providers have significant, if not entire, pricing control. Monopsony is an uncommon type of imperfect competition. A monopsony is a single buyer who has significant price power over the market, rather than any supplier. Monopsony is a term used to describe a situation in which a government entity has exclusive use of a resource. For example, in most countries, the central government is the sole purchaser of certain military weapons. There may be several manufacturers selling these items, but all of them are essentially at the mercy of whatever price the government is ready to pay for them.
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Causes & Characteristics of Imperfect Competition

In the world, imperfect competition is actual competition. Today, some manufacturers and merchants are doing it to make extra money. In this case, the seller takes advantage of his ability to influence the price in order to make more money. A shop will raise prices and profit if it sells non-identical goods on the market. High earnings encourage other vendors to enter the market, and sellers who lose money can go fast. Imperfect marketplaces don't fulfill the same high requirements as a hypothetical, completely competitive market. Competition for market share, high entry and exit barriers, a wide range of products and services, and a small number of buyers and suppliers characterize them. Conditions that lead to imperfect competition include:
  1. A limited flow of cost and pricing information 
  2. Monopoly control of some suppliers is an example of conditions that lead to imperfect competition.
  3. Seller collusion to keep prices high
  4. Maintain seller discrimination against consumers based on purchasing power.
Imperfect Competition in Its Many Forms Imperfect competition is a market structure that exhibits some but not all of the characteristics of competitive marketplaces, according to economic theory.

Types of imperfect competition include:

  • Monopolistic competition (many sellers with highly differentiated products): This is when several enterprises compete with slightly distinct items. Although the production costs are higher than what completely competitive enterprises can accomplish, society benefits from product differentiation.
  • Monopoly (just one seller): A business in which there is no competition. A monopolistic corporation produces fewer units, incurs larger costs, and charges a higher price for its product than if it were subject to competition. Such negative results necessitate government control in general.
  • Oligopoly (few products sellers): This is a market with a small number of enterprises. They organize a cartel in the same way that a monopoly does, to lower output and increase profits. It includes duopoly, a sort of oligopoly in which only two enterprises compete in a single industry.
  • Monopsony (just one buyer of a product): A market with only one buyer and a large number of sellers.
  • Oligopsony: A market having a small number of buyers and a large number of sellers.Perfect Competition
To comprehend imperfect competition, which is defined as the absence of perfect competition, one must first comprehend the characteristics of a perfect marketplace. Suppliers are price takers rather than price makers in a market with perfect competition. The following are the necessary characteristics for a market with perfect competition:
  • In the marketplace, the basic economic dynamics of supply and demand essentially regulate prices. Sellers, in particular, lack significant control over the prices of their goods or services.
  • Several companies sell items or services that are similar or virtually identical. It means that consumers have a variety of options when making purchases; ideal competition requires a large number of suppliers of identical products. In a marketplace with a large number of sellers, imperfect competition is common. Nonetheless, they are all selling original products or products that are significantly different from those sold by their competitors.
  • Several companies have similar market shares, which is another aspect that makes it difficult for a single provider to maintain pricing control.
  • Market data is easily accessible and transparent - buyers may get detailed information on the products or services they want to acquire.
  • Potential new suppliers face few or no obstacles to entry in the industry that offers products or services to the marketplace. It aids in ensuring that the market has a large number of suppliers, making it more competitive.

Conclusion

Imperfect competition is an economic term that refers to market characteristics that make a market less than completely competitive, resulting in market inefficiencies and economic losses. A marketplace with several vendors of identical, or nearly identical, goods or services is known as perfect competition. Monopolies, duopolies, oligopolies, and monopsonies are examples of imperfect market arrangements.
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Sakshi Sachdeva
An experienced professional, Sakshi Sachdeva has been instrumental in propelling Legal Raasta's content creation efforts. Her career path has been varied, with notable stops in the textile, telecom, transportation, and communication sectors. She holds an MCA and an MSc in software degree.
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