Imperfect Competition

Published Oct 25, 2023

Definition of Imperfect Competition

Imperfect competition refers to a market structure in which there are a few firms that dominate the market, and each firm has some degree of market power to influence prices. In contrast to perfect competition, where there are many small firms with no market power, imperfect competition allows for strategic behavior by firms.

Example

To illustrate imperfect competition, let’s take the example of the smartphone market. In this market, there are several major players such as Apple, Samsung, and Huawei, who dominate the industry. Each of these firms has its own unique product offerings and brand image, which differentiates them from their competitors.

Due to their market dominance, these firms have the ability to set prices and have some control over the quantity of smartphones they produce. They engage in advertising, product differentiation, and other strategic actions to attract customers and gain a competitive advantage. This strategic behavior results in a market structure where each firm has some degree of control over its prices and is not a price taker like in perfect competition.

Why Imperfect Competition Matters

Imperfect competition has several important implications for the market and the economy. First, it allows firms to earn higher profits compared to perfect competition, as they can charge prices higher than their marginal costs. This can lead to less efficiency in resource allocation and higher prices for consumers.

Second, imperfect competition encourages innovation and differentiation. Firms in imperfectly competitive markets invest in research and development, advertising, and product differentiation to gain a competitive advantage. This can result in a wider variety of products and better quality for consumers.

Lastly, imperfect competition can have negative impacts on consumer welfare. Since firms have some market power, they may engage in anti-competitive practices such as collusion or predatory pricing, which can harm consumers and limit competition. Therefore, it is important for policymakers to monitor and regulate imperfectly competitive markets to ensure fair competition and protect consumer interests.