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What is Imperfect Competition?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 25 November 2016
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Imperfect competition is a term used to describe a market in which the conditions which characterize perfect competition are not present. In the real world, it is virtually impossible to achieve the goal of perfect competition, in which no one force has the power to manipulate the market. As a result, most markets around the world exhibit characteristic of imperfect competition. Some examples of markets which could be considered examples of this type of market include: oligopoly, monopolistic competition, monopoly, and monopsony.

In this type of market, consumer costs for products do not approach the cost of production due to the fact that pricing is controlled to some extent by sellers and the activities of buyers. There are a number of factors which can lead to imperfect competition, and it is not uncommon to see multiple factors involved in a single market. These factors can sometimes be easy to identify and in other cases may be more obscure in nature or origin, making it difficult to determine which forces are acting upon a market.

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One issue is lack of accurate information. Both buyers and sellers may conceal information with the goal of getting a better deal, and this can contribute to imperfect competition. Sellers marketing differentiated products may also contribute, as the question for consumers boils down less to ultimate cost than it does to quality and associations with the product. Another characteristic sometimes seen in this market structure is the presence of barriers which can make it difficult to enter the market, such as high start up costs or strict government regulations.

For the most part, businesses and consumers have an interest in getting ahead and staying there, whether it's on an individual deal or in the market as a whole. As a result, they can work against each other, contributing to the development of imperfect competition. It is rare to find a market in which competition is perfectly balanced and could be said to be “perfect,” not least because perfect competition may not necessarily lead to the best profits for businesses.

The idea of imperfect competition was put forward in the 20th century by Joan Robinson, a British economist. Robinson discussed the concept in 1933 and contributed a number of other works of scholarship to the world of economics. She spent a great deal of time studying developing nations and was very interested in the manifestations of Communism she saw in Russia and China. Her husband was also a noted economist.

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Tomislav
Post 3

@pleonasm - I think you have a point with the impossibility of perfect competition in the marketplace but I do not necessarily think it has to do completely with the cynical view of greed and people who take advantage of others. I think it is just part of nature.

For example try to look at perfect competition in price alone. You know it cost five cents for company A and company B to make the exact same product.

Lets say benevolent people ran both companies wanted every one in their company to make 5 cents on the round of product which is supposed to cover their living expenses.

There is no way for the company to tell how

many of their product will sell so company A prices their product at 7 cents based on their sales projections and company B prices their products at 10 cents per product.

So even in a set up where greediness was not a factor you still have imperfect competition of prices in the market of the same product.

Therefore, as I mentioned at the beginning of my comment, I do not think it is necessarily imperfect competition because of greed but because business by nature cannot be perfectly calculated.

lluviaporos
Post 2

@pleonasm - Ironically, because the idea of a free market and pure competition is supposed to happen when you take away interference from the government, I think that the only way people could achieve perfect competition was within a completely regulated marketplace.

I'm not sure if that would be better than what we've got now.

All I know is that what we've got now doesn't seem to be working. Big businesses seem to use the most underhanded tactics they can to get ahead at all costs, regardless of the long term consequences.

I like to think perfect competition wouldn't allow for that, because people would simply buy from the best, most respected company. But, maybe that's naive.

pleonasm
Post 1

The fact that we are mostly stuck with imperfect market structure is the reason most idealistic views of society don't work.

For example, when people talk about having a completely free market. In a world with perfect competition, this might work, but in the world we live in, there are always going to be those who will take advantage.

Once someone manages to get an upper hand, they can eventually overtake everyone else and then you end up with a monopoly.

The real world just doesn't operate the way a theoretical world might. People are just too unpredictable, and, let's face it, greedy.

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