It is sometimes considered interesting to define markets that are all run by market forces where the competition among sellers is evenly distributed and all of the players get an equal amount of market share. However, such settings are hard to find in the real world. In reality, there is hardly any economy where all resources are evenly distributed among its players.
Here’s why perfect and imperfect competition is necessary to define.
In a market with perfect competition, the resources are divided equally and evenly among the market participants. There is no monopoly and every player gets an equal share of sales in such markets. Each company in a market of perfect competition would have the same and equal market knowledge and they would sell the same products. There will be no dearth of consumers for any participant in the market and demand would also be equally shared by the players in the market.
For perfect competition in a market, the sellers should sell identical products. Moreover, companies cannot decide the market prices of the products and prices will be set all by market forces. The market share of companies in a perfectly competitive market will be the same. All buyers in a perfectly competitive market would have all and equal knowledge of the products and their attributes. The perfectly competitive market will also have no barriers to entry or exit.
In a perfectly competitive market, the companies would manage to make just enough profits to stay in the business and all players would make equal amounts of profit. The market dynamics would let the companies have an equal playing field and no company can make substantial profits larger than the average profit of the market players.
Perfect competition is just a theory. It is impossible to find perfectly competitive markets in the real world. Therefore, examples of perfect competition are impossible to find although environments that are similar to perfect competition can be found sometimes in imperfect competitions.
Imperfect competition exists when the condition for perfect competition is not met.
For example, a market may be imperfect if non-identical products are sold, and companies become able to define market forces. The market share of companies in imperfect competition is different. All buyers do not have all the information about products equally in an imperfectly competitive market. The imperfect markets lastly may have high barriers to entry or exit.
Imperfect competition may exist in market structures that are monopolies, oligopolies, monopolistic competition, monopsonies, and oligopolies.
In monopolies, there is only one market player that is the leader in the market. It can control the market as and if required. Moreover, it can also control the price of products in the market where a monopoly exists. In other words, in monopolies, the company in the position of the leader, can decide the price of the products, and supply and demand forces can be ignored by the leader.
In the case of oligopolies, there are a few market leaders who may collectively control the market. Technology companies, such as mobile phone manufacturers are a good example of oligopolies. In oligopolies, the players of the market can bar the entry of other players. The players in the market may collectively set the prices of the product or the chosen leader among them may take the price-setting decision.
In monopolistic competition, there are many sellers of the same product that may not be substituted. The barriers of entry may be low in case of monopolistic competition and the companies may set the prices, but the decision of one player does not affect the conditions of the market.
Monopsonies are counterpoints of monopolies. Here only one buyer has many sellers. The government-controlled agencies, such as defense are a good example of monopsony. The buyer in monopsony can set the prices due to the competition among sellers who vie to sell their products to the buyer.
In the case of oligopsony, there are a few buyers but many sellers. The tobacco industry in which less than five companies buy all the tobacco grown in the world is a good example of an oligopsony. Here, the buyers can determine the prices after collective bargaining.
Depending on the features mentioned in the definitions of perfect and imperfect competition above, the following differences between the features may be noted.
| Perfect Competition | Imperfect Competition |
|---|---|
| In a competitive market where there are many buyers and sellers, the sellers sell identical products to the buyers, then it is known as perfect competition. | When the condition is not met, it is considered imperfect competition. |
| Perfect competition is theoretical; it is impossible to find a perfectly competitive market. Perfect competition is usually used as a standard; it has no real-life example. However, there are inferences the market players may get from the conditions of perfectly competitive markets. | The markets we have in real life are all imperfect. |
| In the case of perfect competition, there are always many players in the market. | While in the case of imperfect competition, there can be few to many players. |
| In a perfectly competitive market, the sellers sell identical products. | While the sellers in the case of an imperfectly competitive market sell non-identical products. This means that sellers in the imperfectly competitive market choose their own specialties according to their knowledge and choice. |
| There are no barriers to entry and exit in the perfectly competitive market which is not true in the case of non-competitive markets. | In imperfectly competitive markets, the barriers to entry not only exist but may also be very high so that no new participant may easily enter the market. |
| In the case of a perfectly competitive market, the sellers cannot decide the price of the products. The prices are set by market forces. So, the sellers are price takers in competitive markets. | In the case of imperfectly competitive markets, the sellers can decide the prices so they are price makers. |
All markets in the world are imperfect and as we know there are many instances in which no condition of perfect competition is obeyed by market participants. The real markets run in the profit motive and the players in it are interested in making the maximum profit possible. Therefore, they do not obey the conditions of perfect competition.
However, perfect competition is a good theoretical condition that may be taken as a reference to make the real markets as justified as possible. By following the conditions of perfect competition, the markets may be made to conform to the best possible norms. However, in day-to-day life, no company is interested in following the conditions of perfect competition.
Qns 1. Why is perfect competition considered when it is impossible to obtain in real life?
Ans. Perfect competition is used as a standard to have a reference. It may not be possible to obtain a real-world example of perfect competition but that does not mean that a good standard of market condition should not be theoretically prepared.
Qns 2. Can a market be considered imperfect if only one condition of perfect competition is not obeyed?
Ans. Yes. To be perfect a market must adhere to all conditions of perfect competition. Even if only one condition is not obeyed, it will be considered imperfect.
Qns 3. What controls the market structure in the case of perfect competition?
Ans. The market structure is entirely controlled by market forces in the case of perfectcompetition.
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