Imperfect Competition
Candlefocus EditorThe most commonly discussed forms of imperfect competition are monopolies, oligopolies, monopolistic competition, monopsonies, and oligopsonies. Monopolies are characterized by the existence of a single firm that holds a dominant market position, allowing them to control both the prices and the production of a particular product. Oligopolies are two or more firms that all have some degree of market power and can influence each other with pricing and production decisions due to the small number of participants. Monopolistic competition is similar to perfect competition in that there are numerous participants in the market, but unlike perfect competition, the products are differentiated by brand name and other intangible factors, and the firms have control over the prices. Monopsonies are similar to monopolies except that they involve only one dominant buyer in the market and allow them to gain some level of control over pricing. Finally, oligopsonies are characterized by two or more buyers that can affect the market by controlling the prices of a particular commodity or service.
Despite some similarities, imperfect competition deviates from perfect competition in some important ways. For example, under perfect competition, buyers have perfect information about prices and products available from different suppliers. However, in imperfect competition, firms are able to influence the perception of their product and its prices, thus allowing them to set prices that may not reflect the true market demand. Prices can also remain artificially high due to the existence of entry and exit barriers that limit the number of firms that can compete in the market. Additionally, firms in an oligopoly or monopolistic competition often pursue strategies that limit market growth in order to maximize profits.
Ultimately, economists disagree on how much of a substantial difference the differences between perfect and imperfect competition make for market outcomes. Some economists argue that perfect competition is not a realistic assumption and therefore it may be more useful to explore other market structures that better reflect real-world conditions. Others contend that imperfect competition leads to higher prices and inefficiency, and ultimately results in economic losses. However, the importance of imperfect competition cannot be denied, as it is a common and important element of the free market economy.