Imperfect Competition

Imperfect competition is relatively easier to understand once people have the knowledge of perfect competition. When the five conditions of perfect competition are not made, that market structure is said to be imperfect competition.

Following are the assumptions based on which perfect competition is determined

1. There are large number of buyers and sellers: it is assumed that this market structure is having a large number of buyers and sellers producing commodities.

2. Homogeneous products: All the firms existing in this market structure produces identical products without any product differentiation.

3. Freedom of entry and exit: The firms can easily enter and exit the market based on their preferences or the amount of profit they are earning from it.

4. Perfect knowledge about the market: it is assumed that there is no asymmetric information among the buyers and sellers who have come into the market for the purpose of the economic exchange of buying and selling of the commodities.

5. Perfect mobility of resources: it ensures that the resources or the factors of production can enter or quit a farm or the entire industry at its own will.

The competition is said to be perfect when all the five-condition explained above are satisfied. This means perfect competition refers to the structure when there are a large number of buyers and sellers, all producers are producing identical or homogeneous products, there is freedom of entry and exit of the farms or the producers, every individual coming to the market is having perfect knowledge about the market conditions. And there is perfect mobility of the resources.

Types of Imperfect Market Structure

1. Monopoly

monopoly is a kind of market structure in which there is only a single seller of the product who is also the sole producer of the product and which is having no close substitutes. But on the other hand, there are large number of BIOS for that particular product. For example, people get our electricity supply from one agency that is state electricity board like Punjab electric board in Punjab all West Bengal electric board in West Bengal and so on. Therefore, here people get to see that there is only one electricity producer which means that it is the sole producer of electricity and the citizens or the individuals residing in that state are the buyers of that product. Following are some of the features of monopoly:

I) Single seller

II) Absence of close substitutes

III) Closed entry: one of the most important characteristics of monopoly market is that no farm or producer can enter that particular kind of market. In other words, it

can be said say that there are high barriers to entry which exist when entrepreneurs find obstacles to join a profitable industry.

IV)Price maker: a monopoly farm is a price maker or price setter. It is a sole producer of a product. It can exercise considerable influence on the market supply of the commodity. Therefore, price of the commodity is fully under the control of the mono polished.

V) Possibility of price discrimination: price discrimination refers to a situation when a producer sells the same product two different at two or more different prices for reasons not associated with difference in cost of supplying the product to different consumers. For example, many hospitals charge lower operation fees from the poor patients a higher fee from rich patients.

2. Monopolistic competition:

Monopolistic competition is the form of market structure in which there are a large number of sellers of a particular product, with each seller selling somewhat differentiated but close substitutes to the product sold by other sellers. Following are some of the features of monopolistic competition:

I) Large number of buyers and sellers

II) Differentiated products

III) Free entry and exit: in this kind structure kit structure farms and producers can enter or exit the market at its own will. There is no restriction upon that.

3. Oligopoly

It is that form of market structure where there are a very few numbers of firms that sells a product and there is no intense competition among them. In the modern economies, oligopoly is one of the main market structures for the production of a large number of goods like the electronic products, automobile products, the soft drinks, vegetables etcetera.

I) Intense competition: as there are a very few numbers of sellers who are in the market and they sell somewhat identical and as well as differentiated product in the market, there is a chance and there do exist intense competition among them.

II) Interdependence: the number of firms in oligopoly is so less that each farm is in a dilemma about how its rivals are going to react on any of the changes that it does to its business.

III) Barriers to entry: Oligopoly in the long run ask for a necessary existence of effective barriers to the entry of new firms into the market. If there are no such restrictions or barrier to entry, cannot be called as oligopoly market.

4. Monopsony market structure

It can be defined as the situation or condition where there is a single buyer of the product and who is not in the competition with other buyers for the product which is being bought and in which the entry in the market structure by any other buyers is impossible. For example, the mining firm in a village can be practically the sole buyer of some specialised kind of Labour.

I) Single buyer: Monopsonist market structure where there is a single buyer of a commodity or service.

II) Number of sellers: since it is known that there is a circle buyer of the commodity, they are a large number of suppliers of that commodity. For example, in a monopsony, a single employer faces a large number of workers.

III) Lack of mobility: in the case of Labour market, Monopsony can emerge only if there is lack of geographical or occupational mobility. If the workers are mobile so that they can move from one place to another in search of a better job or better standard of leaving, then there cannot be monopsony existing in that market structure.

Therefore, the above market structure is known to be imperfect competition, as because in this case the market failure takes place. Now the question comes that what is market failure? Market failures refers to the situation where the market cannot itself or just the demand and supply of goods and services that is being bought and sold into the market. When this situation happens, perfect competition does not exist and as a result imperfect competition takes place.

Context and Applications

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for

  • BBA
  • MBA

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