What is Imperfect Competition?

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Imperfect competition refers to a market structure where some form of market failure exists, meaning not all market participants have perfect information, and there is a degree of monopoly, monopolistic competition, or oligopoly. In an imperfectly competitive market, individual firms or a few firms have the ability to influence market prices, products may be differentiated, and there are significant barriers to entry and exit. Common types of imperfect competition include monopoly, oligopoly, and monopolistic competition. This market structure typically results in less efficient resource allocation compared to a perfectly competitive market.

Definition

Imperfect competition refers to a market structure where some form of market failure exists, meaning not all market participants have complete information, and there is a certain degree of monopoly, monopolistic competition, or oligopoly. In an imperfectly competitive market, individual firms or a few firms have the power to influence market prices, products may be differentiated, and there are high barriers to entry and exit.

Origin

The concept of imperfect competition originated in the early 20th century when economists like Edward Chamberlin and Joan Robinson conducted in-depth studies of market structures, proposing theories of monopolistic competition and oligopoly. These theories help explain the common phenomenon of imperfect competition in real markets.

Categories and Features

Imperfect competition mainly includes three types: monopoly, oligopoly, and monopolistic competition. A monopoly refers to a market with only one supplier, having complete market control. An oligopoly is a market dominated by a few large companies, which compete but may also collude. Monopolistic competition refers to a market with many sellers, but each seller's product is somewhat differentiated, leading to incomplete price competition.

Case Studies

A typical monopoly case is the American electric company, such as Edison Electric, which has market control due to exclusive supply rights in specific regions. An example of oligopoly includes the aviation industry, where Boeing and Airbus dominate the large commercial aircraft market. Monopolistic competition can be seen in the restaurant industry, where many restaurants offer similar but slightly different menus to attract different customer groups.

Common Issues

Investors in imperfect competition markets may face challenges such as high barriers to market entry, price manipulation risks, and decision-making difficulties due to information asymmetry. A common misconception is that all markets can achieve optimal resource allocation through competition, overlooking the efficiency losses in imperfect competition markets.

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