Imperfect Competition

What is Imperfect Competition?

The imperfect competition is the Market failure situation wherein the Law of Demand and supply is not used independently to comprehend prices, but wherein there should be a balance in the prices. In this situation, the companies might have enough market power to impact the market’s price.

The primary consequences of this market power have a negative effect on the welfare of consumers and can result in Efficiency loss. Moreover, under specific situations, the companies compete in such scenarios where they don’t have to imply the loss of consumer welfare.

History of Imperfect Competition

Initially, this concept was developed by Roy Harrod, a celebrated English Economist. Back in 1933, Edward Chamberlin of Harvard University in America and Joan Robinson of Cambridge University in England, two different economists, complemented the notion of imperfect competition with necessary contributions.

Explaining Imperfect Competition

In the environment of imperfect competition, firms sell different services and products, set their individual prices, fight to get market share and generally are protected by barriers to exit and entry, making it even difficult for new companies to pose a challenge.

Furthermore, imperfectly competitive markets are prevalent and can easily be found in varying market structures, such as:

• Monopolies
• Oligopsonies
• Monopsonies
• Monopolistic competition
• Oligopolies

In contrast to perfect competition, the imperfect one is a competitive market, wherein there are a specific number of sellers, but the products sold are heterogenous, meaning they are substantially different from one another.

For this specific reason, individuals get the liberty to set prices as they want, keeping in mind, there are no two products with the same features. Generally, sellers take advantage of this price, deciding power to

And then, such high profits are more appealing to new sellers who look forward to joining this market. In opposite, sellers who incur loss would leave the market altogether. The exit and entry of the market might not or have linked costs; hence the level of difficulty would depend on every situation of imperfect competition.

In the economic theory, the imperfect competition would acquire the market type that deviates from the adequate perfect competition and could be regarded as the real-world competition’s reflection.

One of the essential characteristics of the imperfect competition is that every seller can be regarded as the close substitutes of each other.