The Concept Of Imperfect Competition

In perfect competition, there are so many firms selling the same product that none of them can affect the market price. In monopoly, there is just one seller in the market, so it sets the price as it wishes. Most markets for goods and services, however, are neither perfectly competitive nor perfectly monopolistic. Instead, they lie some where between these two extremes, with more than one firm, but not enough firms to qualify for perfect competition. We call such markets imperfectly competitive:

Imperfect competition refers to market structures between perfect competition and monopoly. In imperfectly competitive markets, there is more than one seller, but too few to create a perfectly competitive market. In addition, imperfectly competitive markets often violate other conditions of perfect competition, such as the requirement of a standardized product or free entry and exit.

Consider the market for automobiles in the United States. It is certainly not a monopoly, since more than a dozen companies sell cars here: General Motors, Ford, DaimlerChrysler, Mazda, Toyota, Honda, Volvo, Nissan, and several more. But neither is this market perfectly competitive: Each of these firms supplies a relatively large part of the market, so each can affect the market price. Moreover, the product of each firm is different from the products of the others: A Toyota is not a Ford, and a Ford is not a Jeep. The market for automobiles, then, falls somewhere between the extremes of monopoly and perfect competition.

Or consider restaurants. Even a modest-size city such as Cincinnati has more than 3,000 different restaurants. This is certainly a large number of competitors, but they are not perfect competitors, since each one sells a product that is differentiated in important ways—in the type of food served, the recipes used, the atmosphere, the location, and even the friendliness of the staff.

In this chapter, we study two types of imperfectly competitive markets: monopolistic competition and oligopoly.

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