Imperfect Competitive Market Theory

Imperfect Competition Market Theory

In economics, imperfect competition is a market structure whereby the seller’s prices are not the same, and that there exist restrictions that prevent buyers and sellers from freely exchanging goods and services. While perfect competition is the most optimal market model, many markets operate with characteristics that make them imperfectly competitive. This article provides an overview of the main characteristics of imperfectly competitive markets, highlighting their differences from perfect markets.

In terms of structure, imperfectly competitive markets are characterized by the presence of non-uniform product offerings and/or prices. The non-uniform pricing can be made possible by the presence of product differentiation amongst competitive firms or by the fact that some firms possess market power due to the existence of entry or exiting restrictions. In addition, there can be a high degree of oligopoly with a limited number of firms controlling the overall market. In such markets, firms have the incentive and ability to influence market prices, making markets less competitive and distorting the efficient allocation of resources.

In terms of price, imperfectly competitive markets are typically characterized by non-uniform prices and price discrimination. For example, firms can price discriminate by charging different prices for the same product to different segments of the population or at different times of the day. Additionally, firms can practice “first-mover pricing” where they set a high initial price for a new product and then gradually decrease it as rivals enter the market. These pricing strategies allow firms to capture more of the market share and extract more value from consumers.

In terms of market quantity, imperfect competition can also lead to suboptimal outcomes. For example, firms may choose to restrict output in order to increase prices and make more profits. This can lead to lower levels of output, reduced consumer surplus, and more inefficient resource allocations. In addition, firms may encourage advertising and spend money on other marketing activities in order to differentiate themselves and better position their product offerings in the marketplace. This can also lead to higher levels of marketing expenditure and less efficient resource allocations.

Finally, imperfectly competitive markets can lead to a lack of market competition in terms of innovation and new product introductions. Firms that possess market power can limit the introduction of new products in order to maintain their control over the market. This can lead to stagnant innovation and a decline in overall industry growth.

In conclusion, imperfect competition can lead to several economically undesirable outcomes. Firms may employ pricing strategies that distort market prices and lead to inefficient resource allocations. They may also restrict output and limit innovation in order to maintain their market power. Thus, it is important for policymakers to ensure that all markets are fully competitive by identifying and eliminating any non-uniform prices, any entry and exit barriers, and any pricing strategies that distort the efficient allocation of resources.

Imperfect competitive market theory is an economic theory which explains how suppliers, through their pricing strategies, can influence demand and affect market forces. Imperfect competitive market theory posits that in an imperfectly competitive market there is an advantage for firms to differentiate their products from competitors, and set different prices for different market segments. This creates a situation where different competing firms can have different prices for the same amount of product.

The theory states that in some markets, instead of the traditional conditions of competition which involves a large number of equal competitors competing with each other by offering products at the same prices, certain firms may have certain advantages which allow them to set different prices for each market segment. These advantages may include, for example, exclusive access to sources of materials, access to capital, technological know-how, or even location-specific advantages, such as those linked to the presence of large customer bases.

The main difference between perfect competition and imperfect competition lies in the fact that firms operating in the latter market have more control and influence over the price of their products, and can consequently increase, or reduce, their profit margins. This will depend on the objectives of the firm and the strategy they have chosen.

In addition to the differences in price, imperfect competition imparts a variety of other effects on the market. One of the most notable is that, when a seller is able to reduce the price of a product, the demand for the product increases, which leads to a higher overall demand. In the same vein, if a firm is able to raise the price of a product, then demand for the product decreases, and that has a corresponding lowering of overall demand. In some cases, firms may also be able to manipulate their levels of production in order to increase their profitability.

Although there are advantages for firms that opt for the imperfect competitive market theory, there are also some major drawbacks. One is that, as the advantages associated with an imperfect market give certain firms an edge over their competitors, it effectively reduces the levels of competition in the marketplace. This, in turn, reduces incentives for firms to innovate, and to offer new/better products/services. Furthermore, it creates a situation where larger, more competitive firms have an easier time taking over markets, thus leading to less diversity in the marketplace.