Imperfect Competition
Imperfect competition is a market structure in which there are a large number of buyers and sellers, but each firm is a small player in the overall market. This means that firms can influence the market price, but they are not able to control it completely.
Characteristics of Impperfect Competition:
- Many buyers and sellers: There are a large number of buyers and sellers in the market, so that no firm can influence the market price on its own.
- Few product differentiations: Firms in imperfect competition produce similar products, so that consumers are not able to distinguish between them.
- Non-price competition: Firms compete on factors other than price, such as quality, brand name, and customer service.
- Some market power: Firms have some market power, which means that they can influence the market price. However, they do not have complete control over the price.
- Excess demand: Firms produce more than the quantity that is demanded at the market price. This is because firms are willing to produce more of a product if they can sell it for a higher price.
Examples of Imperfect Competition:
- A market for corn
- A market for gasoline
- A market for steel
Key Differences from Perfect Competition:
- Price takers: Firms in imperfect competition are price takers, which means that they take the market price as given.
- Quantity decisions: Firms in imperfect competition make quantity decisions based on the market price and their own demand curve.
- Non-price competition: Firms in imperfect competition compete on factors other than price, such as quality and brand name.
- Excess demand: Firms in imperfect competition produce more than the quantity that is demanded at the market price.
Challenges:
- Determining market price: It can be difficult to determine the market price in imperfect competition, as firms can influence the price but are not able to control it completely.
- Competition on factors other than price: Firms in imperfect competition need to compete on factors other than price in order to attract customers.
- Excess demand: Firms in imperfect competition must deal with excess demand, which can lead to a surplus and a decrease in profits.
FAQs
What is meant by imperfect competition?
Imperfect competition refers to market structures where firms have some control over prices, and products are differentiated. Examples include monopolistic competition and oligopoly.
What is the difference between perfect and imperfect competition?
Perfect competition features many sellers with identical products and no price control, while imperfect competition has fewer sellers, differentiated products, and price control.
Is McDonaldโs an example of imperfect competition?
Yes, McDonaldโs operates in monopolistic competition, an imperfect competition market where products are similar but differentiated.
What market structures fall under imperfect competition?
Imperfect competition includes monopolistic competition, oligopoly, monopoly, and duopoly.
What is a real-life example of imperfect competition?
Apple operates in an imperfect competition market due to product differentiation and brand loyalty.