What Is Imperfect Competition in Economics?

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In an imperfectly competitive market, sellers have the freedom to set their prices for products and services and compete for market shareMarket ShareMarket share determines the company’s contribution in percentage to the total revenue generated within an industry or market in a certain period. It depicts the company’s market position when compared to that of its competitors.read more. It also creates stricter barriers to entry for new and exit for existing market players. As a result, both buyers and sellers can take advantage of the market priceMarket PriceMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price.read more of products in such markets.

Key Takeaways

  • Imperfect competition definition is a competitive market with several sellers selling dissimilar goods and services in varying segments for different customers. In such a market, sellers can set their prices for goods and services and compete for market share. It raises the entry and exit barriers for new and existing market players. Its typical features are multiple buyers and sellers, price control, product differentiation, and free entry and exit. It also opens up the possibility of additional earnings. The concept remains true in different marketplaces, such as monopoly, duopoly, oligopoly, monopsony, and oligopsony.

Imperfect Competition Market Explained

An imperfect competition market is a market with non-competitive sellers. The products in such marketplaces differ, as do the target clients and the segments in which enterprises operate. In this situation, sellers have the exclusive right to set the market price of the goods they offer. They do not require the approval of a higher authority in the regions in which they operate to determine the same. In other words, each seller adheres to their price-output policy.

Product differentiationProduct DifferentiationProduct differentiation refers to making a product look attractive and different from other products in the same class. Marketers highlight the distinguishing features in the product commonly through packaging or a good design, which helps communicate the benefitting factors to the shoppers.read more allows sellers to make more money than their competitors in an imperfectly competitive market. However, it causes market inefficiencies, resulting in economic value losses. Even if there are multiple sellers in a market, if one of them captures 60% of the market, it indicates imperfect competition. It is the polar opposite of a perfectly competitive market, in which sellers compete for the same target customers to persuade and sell goods and services.

Profits earned in imperfect marketImperfect MarketImperfect market structure is a part of microeconomics in which companies sell different products and services, as opposed to perfect competitive markets in which homogeneous products are sold. Companies in this sector have some pricing power with high barriers to entry, resulting in higher profit margins as each company tries to differentiate their products and services through innovative technology.read more competition due to high pricing attract new market players and allow existing loss-making market players to exit the market. However, the barriers to entry are stricter.

In perfect market competition, sellers do not have the freedom to set the market price because the price ranges of the other participants in the same product category are similar. On the other hand, in a market with non-identical goods, sellers have the liberty to set prices high to maximize profits because they have no one to compete with. While product information is not always apparent in an imperfect competition market, it is critical in a perfect competitionPerfect CompetitionPerfect competition is a market in which there are a large number of buyers and sellers, all of whom initiate the buying and selling mechanism. Furthermore, no restrictions apply in such markets, and there is no direct competition. It is assumed that all of the sellers sell identical or homogenous products.read more market to guarantee customers have enough information to decide whether to buy a certain product or look for a better one.

Imperfect Competition Market Structures

The concept of imperfect market competition holds true in the following types of markets:

  • Oligopoly: It consists of a small group of sellers who can influence the conduct of other businesses.Monopoly: It is a market in which only one seller offers heterogeneous goods and services and can affect the price of the same.Duopoly: It comprises only two sellers, each with absolute power and control. Oligopsony: It has a very small number of buyers.Monopsony: A market with just one buyer.

Example

The airline sector is one of the best imperfect competition examples. Because of the high cost of aircraft, there are only a few airlines to choose from, creating higher barriers to entry. Though travelers have many options, each airline has its unique features that stand out from the competitors, making them players in the market. Similarly, stock marketsStock MarketsStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more are imperfect because not all investors know everything about potential investments.

Characteristics

In 1933, Joan Robinson of England and E.H. Chamberlin of America introduced the concept of imperfect competition. It exhibits the following characteristics:

#1 – Multiple Buyers And Sellers

Several sellers operate in the non-competitive market independently, but none of them influence the performance of the other. It is because they all deal with different products and services. Therefore, no matter how many sellers are there, the target customers remain divided, and hence, the division of buyers is known.

#2 – Product Differentiation

The products and services in a non-competitive market might be similar but never identical. As a result, customers remain divided. Sellers understand which segments of customers they should target for their products. They do not have to worry about competition because those who favor their brands will stick with them.

Seller A, for example, sells infant food, while seller B sells feeding bottles. Both sellers sell baby products and target the same customers. But they are not rivals as their products are not similar.

#3 – Price Decision

The best part of an imperfect competition market is that the sellers are free to determine the price of their products or services. With respect to the convenience of customers, they set the market value of their offerings without having to worry about how their competitors have priced the same.

#4 – Free Entry & Exit

Firms have the freedom to enter and exit imperfect competition markets. However, it may be difficult to break into such a market, especially if the products to be sold are comparable to those offered by an existing seller.

This has been a guide to What is Imperfect Competition in Economics. Here we introduce & define imperfect competition, its market characteristics, & example. You can learn more from the following articles – 

Imperfect competition is a market containing non-competitive sellers. The products, target consumers, and market categories, in which businesses operate differently in such marketplaces. Sellers have sole authority over the market price of the goods they supply in this arrangement. Profits made in an imperfect market due to high pricing attract new market participants while allowing existing loss-making market participants to quit.

  1. Oligopoly: This is a situation in which a small group of vendors has the power to affect the behavior of other enterprises. 2. Monopoly: It is a market in which only one seller sells various goods and services and can influence the price of those goods and services. 3. Duopoly: It consists of only two sellers, each of whom has complete power and control over the other. 4. Oligopsony: There are a limited number of purchasers. 5. Monopsony: A market in which there is just one buyer.

• Several vendors operate, but none of them impact the performance or profitability of the others. • Products may resemble one another, but they are never identical. • Sellers are free to set and control prices for their products. • Firms are free to enter and exit the market.

  • Perfect CompetitionMonopoly vs Monopolistic CompetitionPerfect vs Monopolistic Competition