Imperfect competition

An imperfect competitive market is a type of market where the conditions of the perfect competitive markets are not satisfied. Perfect competitive makes indicate that no one firm in the market can influence market prices, there are no barriers to entry and there is free exit from this market, suppliers offer homogenous goods and there exist information asymmetry  that encourages price and costs asymmetry. The imperfect market will have characteristics that are opposite of the perfect competition market. The types of imperfect competition are the monopoly (single seller), monopolistic competition (many sellers manufacturing highly differentiated goods), oligopoly (few sellers), duopoly, monopsony (single buyer) and oligopsony (few buyers).Imperfect might also be caused by other characteristics other than the firm’s behavior. An example is imperfect competition due to different time lag in the market.

Characteristics of monopolistic competition

  • Under these types of market structure there are many buyers and sellers hence no individual buyer or seller can influence the market to his/her own favor.
  • The products sold in this market are highly differentiable and consumers will choose to buy any product according to their taste and preference, brand loyalty, level of advertisement and the purchasing power of consumers.
  • There is a relatively small freedom for firm’s entry and exit from this market.
  • A firm has the capability of forming a tiny monopoly because of product differentiation in the market. This will happen if the firms have created brands for their products, or have superior advertising policy.
  • Some firms will have a significant level of influence on the prices they charge for their goods and services.

Characteristics of oligopoly market structure

  • The market structure is composed of few but large numbers of firms.
  • A huge number of the firms in this market structure will make up the industry
  • The products sold in this market are highly differentiable due to branding. Therefore although the products seem to be homogenous branding makes them very unique.
  • There exists a high level of barrier to entry by the already established players.
  • There is no price competition.
  • The product prices are very stable and do not fluctuate constantly this is shown by the kinked demand curve.
  • There is potential collusion by firms in this market either to set prices or drive some firms out of the market.
  • The firm in this market has the potential to earn abnormal profits.
  • There is high degree of interdependence between the firms in the market

The level of oligopoly is a measured quantity .the concentration ratio will be used to calculate the market share accounted for by each firm operating in the industry.    A special type of the oligopoly market structure is the duopoly. In this type of market there are only two large firma that dominate the market. There will be the price lead between the two market who will dictates the market prices will the other firm will be reduced to a price follower. The two firms will also create restriction for firm that want to join the market hence creating a free market for themselves to  earn abnormal profits.

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{ 2 comments… read them below or add one }

iakovos March 12, 2014 at 10:19 pm
Lalise Tegegn June 2, 2014 at 5:59 pm



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