Imperfect competition

Developed by English economist Joan Robinson (1903-1983), imperfect competition describes a market characterized by a large number of buyers and sellers, dealing with differentiated products, and in which there are no barriers to entry or exit.

Imperfect competition differs from perfect competition principally in that its products are highly differentiated.

Also see: monopolistic competition

Source:
J Robinson, The Economics of Imperfect Competition (London, 1933);
P A Samuelson, ‘The Monopolistic Competition Revolution’, Monopolistic Competition Theory: Studies in Impacts, R E Kuenhe, ed. (New York, 1967)

Conditions of imperfect competition

If ONE of the following conditions are satisfied within an economic market, the market is considered “imperfect”:

  • The market’s goods and services are Heterogenous or Differentiated. This means that firms can charge higher prices as their goods and services are perceived as better;
  • The market contains ONE or few sellers;
  • There are barriers to market entry and exit[disambiguation needed]. If there are barriers to market entry and exit, there may be special costs to a firm that may prevent or make it difficult for a firm to enter or exit an industry market. Additionally, if prices are different, buyers may not have the ability to easily switch suppliers and thus, suppliers cannot easily exit or enter the market; and
  • Market firms are NOT price takers and hence, have some control over the pricing of their goods and services.

Monopolistic competition

A situation in which many firms with slightly different products compete. Moreover, firms compete by selling differentiated products that are highly substitutable, but are not perfect substitutes. Therefore, the level of market power under monopolistic competition is contingent on the degree of product differentiation.

There are two types of product differentiation:

  • Vertical differentiation: a product is unambiguously better or worse than a competing product (e.g. products that differ in efficiency or effectiveness); and
  • Horizontal differentiation: a product that only some consumers prefer to competing products (e.g. Mercedes Benz and BMW). [4]

Furthermore, each firm shares a small percentage of the total monopolistic market and hence, has limited control over the prevailing market price. Thus, each firms’ demand curve (unlike perfect competition) is downward sloping, rather than flat. Additionally, cross-price elasticities of demand are large (but not infinite). Production costs are above what may be achieved by perfectly competitive firms, but society benefits from the product differentiation. [5]

Oligopoly

In an oligopoly market structure, the market is supplied by a small number of firms (more than 2). Moreover, there are so few firms that the actions of one firm can influence the actions of the other firms. Under this market structure, the differentiation of products may or may not exist.[6] The product they sell may or may not be differentiated and there are barriers to entry: natural, cost, market size,… or dissuasive strategies.

In an oligopoly, barriers to market entry and exit are high. The major barriers are:

  • Patents;
  • Technology;
  • Economies of scale;
  • Government regulation (e.g. limiting the issuance of licences); and
  • Firm name recognition. [7]

If two firms collude, they form a cartel to reduce output and increase their firms’ profitability. Oil companies, grocery stores and some telecommunication companies are examples of oligopolies

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