Imperfect Competition Economics
Imperfect competition economics is a concept that suggests that the markets and prices of certain goods or services are composed of overlapping elements, such as monopoly, oligopoly and monopolistic competition, with different products and services having different market dynamics. Through a detailed analysis, the theme of imperfect competition economics is one that advocates for greater competition in the marketplace and attempts to better understand the complexities found in various market forms.
The root of the concept of imperfect competition originated from the Austrian School of Economics, originating in the late 1850s. Generally, the economic theory associated with Imperfect Competition Economics postulates that in the presence of imperfectly competitive markets, certain goods or services will quickly become monopolized, creating situations in which there is a lack of effective competition and a single seller holds an undue degree of market power. This creates market inefficiencies and can result in abusive pricing and discrimination due to the lack of competitive pressure.
A classic example of imperfect competition is with modern day monopolies. Monopolies have the potential to control and dominate both the market and the prices of certain goods and services, creating an environment that is not favorable for competition, nor is it favorable to the consumer. A monopoly will generally charge higher prices than those found in a competitive market and may also reduce output or limit the availability of product. By reducing the amount of competition, a monopoly will also reduce the amount of product innovation, as less incentives exists for a monopolistic market to produce goods of better quality or offer more goods or services.
Another example of imperfect competition economics is prevalent in oligopoly markets. An oligopoly is a type of market structure in which countable numbers of firms or sellers present in the market and the production level highly depends on collusion. Firms in this market possess a contemporary knowledge of each other’s pricing and output decisions. If one firm increases its prices, the other firms naturally follow suit, as they are aware of its implications. In terms of pricing, firms in an oligopoly setting have the potential to charge prices above marginal costs, as well as reduce output, leaving the market with inefficiencies and costs to consumers.
The difficult part of imperfect competition economics is that it is a difficult concept to define, largely because the market dynamics underlying certain goods and services are ever changing. Being that the underlying principles behind imperfect competition are constantly in flux, it can be difficult to apply economics principles to markets with imperfect competition. Even so, it is still important to understand the underlying principles of imperfect competition and to apply them appropriately.
In general, the two most widely accepted aspects of Imperfect Competition Economics are (1) identifying and examining the various market forms, such as monopoly, oligopoly and monopolistic competition, and (2) understanding the dynamics that lead to imperfect competition and the consequences of such a system on the consumer. Understanding these two aspects of market dynamics can help to enhance competition, reduce costs and extend market efficiency. Ultimately, Imperfect Competition Economics advocates for more competition in the marketplace and tries to better understand the complexities found in various market forms.
