Imperfect competition is a market structure characterized by a degree of market power
held by individual firms, resulting in a departure from the idealized conditions of perfect competition. In contrast to perfect competition, imperfect competition encompasses various market structures where firms have the ability to influence market prices and output levels.
The key distinction between imperfect competition and perfect competition lies in the degree of market power that firms possess. In perfect competition, a large number of small firms operate in the market, each producing an identical product. No single firm has the ability to influence the market price
, and all firms are price takers. This means that individual firms have no control over the price at which they sell their products and must accept the prevailing market price.
On the other hand, imperfect competition encompasses a range of market structures, including monopolistic competition, oligopoly
, and monopoly. In these market structures, firms have some degree of market power and can influence prices and output levels to varying extents.
Monopolistic competition is a form of imperfect competition characterized by a large number of firms producing differentiated products. Each firm has some control over the price it charges due to product differentiation, but this control is limited as there are close substitutes available in the market. Firms in monopolistic competition engage in non-price competition, such as advertising and product differentiation, to attract customers.
Oligopoly is another form of imperfect competition where a small number of large firms dominate the market. These firms have substantial market power and can influence prices and output levels. Oligopolistic markets are often characterized by interdependence among firms, as their actions can have significant effects on competitors. Strategic behavior, such as collusion
or price leadership, is common in oligopolies.
Lastly, monopoly represents the extreme form of imperfect competition where a single firm dominates the entire market. A monopolist
has complete control over the market price and can set prices and output levels without considering competition. Monopolies often arise due to barriers to entry
, such as patents or exclusive access to resources, which prevent other firms from entering the market.
In summary, imperfect competition refers to market structures where firms have some degree of market power and can influence prices and output levels. This stands in contrast to perfect competition, where firms are price takers and have no control over prices. Imperfect competition encompasses various market structures, including monopolistic competition, oligopoly, and monopoly, each characterized by different levels of market power and strategic behavior.