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Imperfect Competition
Impperfect Competition
Impperfect 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.