Imperfect Competition

Imperfect competition refers to a competitive market with multiple sellers, all of which sell non-identical goods and services. The lack of competitive suppliers in an economic market makes it less perfect than perfectly competitive and can lead to market failure. However, it opens up prospects for increased profit.

In an imperfectly competitive market, sellers have the freedom to set their prices for products and services and compete for market share. 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 price of products in such markets.

• 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.

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 differentiation 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 market 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 competition market to guarantee customers have enough information to decide whether to buy a certain product or look for a better one.

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

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

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 markets are imperfect because not all investors know everything about potential investments.

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 – 

• Perfect Competition
• Monopoly vs Monopolistic Competition
• Perfect vs Monopolistic Competition