What is an imperfect competition?
Imperfect competition describes a market which does not meet the criteria for a perfect competition. A perfect competition is a market in which no participants have enough influence or power that will enable them to influence or set the price of a product, good or service. In a perfect competition, participants are considered to be more or less equal. However, the criteria for creating a perfect competition market is very strict and it is not often met under real-life economies or market situations. When these criteria are not met, then the market is called an imperfect competition. Imperfect competition is very common and is the most common type of market found today. Imperfect competitions are usually measured against the criteria of a perfect competition as a way to illustrate what is considered unique or different in an imperfect setting.
What are some characteristics of an imperfect competition?
The main characteristic of an imperfect competition is that it is, of course, not perfect. This means that it is not able to hold to the standards required for a market to be called perfect competition.
These standards include the following:
no participants are able to influence the price of the product they buy or sell; an infinite supply of buyers and sellers who are willing and able to buy and sell a product, good or service; zero entry and exit barriers, meaning that it must be easy for businesses and enter and leave the market; perfect information or information about the price and quality of the products are known and can be assumed by buyers and sellers; zero transaction costs, or no costs or fees association with making an exchange between buyer and seller; homogenous products, or products which do not vary across the board of suppliers; perfect factor mobility, which means that in the long run the factors of production are able to be freely adjusted to any changing conditions in the market; profit maximization, or when marginal costs meet marginal revenue, which generates profit.
Essentially, the characteristics of an imperfect competition are what makes it imperfect. These characteristics are incredibly varied and range from one or more participants having enough power to set the price of a product to non-homogenous products across the market, resulting from different supplies or even businesses who simply have better or worse quality than their contemporary businesses. Other characteristics include requiring costs and fees to make an exchange, which can occur in markets where fees much be charged for a buyer to purchase a product—including credit or debit card fees—or where sellers are required to pay fees or dues in order to sell their products to consumers, such as fees required by online selling websites.
What are some examples of an imperfect competition?
There are several notable examples of an imperfect competition. Many of these examples are very familiar to those who study economics because they have been around for decades; unlike perfect competition, imperfect competition markets are very easy to create and are much more common in today’s economy due to many factors which can create an imperfect market. There are two particular examples of an imperfect competition which are the most familiar to many people.
Monopoly: A monopoly occurs which one particular person, business or participant in a market is the only supplier of a certain good, service, product or other commodity. In a monopoly, this participant is able to set the price of the commodity to be sold, they are able to make it difficult for other participants to enter into the market to sell that same commodity, and they are able to change both the price and quality of their product due to their control over the market for this product. While many countries have laws in place which are meant to prevent monopolies, they can and do still exist in many markets.
Monopsony: A monopsony occurs which only one particular buyer or buyer participant in the market is the only buyer of a specific good. A monopsony is essentially a contrast to a monopoly, in which there is one seller for many buyers. in a monopsony, there is one buyer to many sellers. A monopsony gives the buyer the advantage because they allow the buyer to control the sellers, who need to sell to these individual or participant. Buyers are then able to force sellers to match prices, cut prices or even change quality in order to keep up with their competition.
Both of these markets are considered imperfect because they do not meet the criteria of a perfect competition market. In a monopoly, one seller is able to influence the price of goods; in a monopsony, one buyer is able to influence the price of goods.