Imperfect competition market structure is where the firms that operate in a market have a lot of control over the good or service they produce. This will happen when the numbers of firms that produce that good or supply a certain services are very few in the market. Imperfect competition market structure is the most common type of market structure in the market. We can illustrate imperfect competition by an example in the energy sector. If there is only one gas station in your geographical area and you cannot afford to go and buy fuel from the neighboring gas station because of its distance and costs. Then your local gas station will price its commodity above the prevailing market prices because there is no competition from other firm. The consumers do not have any choice but to purchase from this station at the inflated prices. The gas station has therefore created an imperfect market.
There are some imperfect types of competition that are useful to the society. An example of a useful market structure is the natural monopoly. This type of market structure is as a result of the government giving some company the sole license to produce certain commodity in the market. The other reason why such a monopoly may exist is that the marginal cost of producing such a commodity is very high. The government will therefore ensure one company is producing in the market to avoid the distribution of proceeds to the many company creating one efficient company. This way the firm in the market will have a large customer’s base that will be able to pay for the average total costs without bringing the prices of the commodity down. If the prices of these goods and services were to be brought down then it would not be economical to produce them. If competition was allowed then this commodity will seize to be produced or will be undersupplied due to high costs. An example of this is the provision of railway, electricity and fuel/gas. Every citizen in any country will attest that the providers for these services are very few in their country. These products will be similar to almost all citizens in a country. Example is the electricity and fuel sector. These services will be similar to all citizens and will be provided by one company.
The characteristic of imperfect market structure is that they reduce the economic surplus to varying degrees. Economic surplus is the extra revenue you acquire from selling a commodity at a higher price more than what you were willing to sell in the market. There are five major sources of market power in the imperfect market competition. There are
- Exclusive control of the factors of production
- Having the patent right or copy rights in the production of a good or service
- Government regulation
- Firms network in a market to create economies of scales.
- Natural monopolies
An example of a monopoly that is created by economies of scale is the microprocessors production by the Intel that is used in personal computers. The Intel Company has the capacity to produce in large scale therefore reducing the costs for each micro processor.