Imperfect Competition

In the real world, we’re all imperfect, and competition is as well. Imperfect competition is...well...not perfect competition.

What's perfect? Well, it exists when there are a lot of sellers and buyers, there's no product differentiation, buyers have perfect knowledge about all the products, entering and exiting the market is easy, and firms are price takers (instead of price makers, which would be monopolistic).

Since perfect competition doesn’t exist in real life, pretty much all real-life markets are imperfectly competitive. There’s often one (monopoly) or a few (oligopoly) firms, and firms definitely differentiate their products (think: Coke vs Pepsi, coffee vs frappa-mocha-chino-latte with a shot of raspberry snot, etc.). Consumers usually don’t have perfect information about the products they’re buying, both because of the time it would take, and because not all that info is available anyway. Entering most markets requires some up front costs, too.

The only thing perfect competition and imperfect competition do have in common is that there are buyers seeking to buy things they want, and sellers seeking to maximize profits.

Related or Semi-related Video

Econ: What is Perfect Competition?3 Views

00:00

And finance Allah shmoop What is perfect competition people It's

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true in the real world and nothing's perfect and markets

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are no exception Perfect competition is a hypothetical market structure

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one where no firms are undercutting each other and consumers

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never get ripped off While perfect competition doesn't exist in

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the real world it's a useful bar to compare other

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market structures to something like Oleg Op Elise monopolies monopolistic

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competition and other things of similar ilk There are five

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key ingredients in the perfect competition Punch bowl one There's

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no differentiation in goods and services I all firms they're

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selling the same stuff within one market For instance in

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order for the lemonade market on Maple Street to be

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in perfect competition Jill Joe and Sammy would all be

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selling the exact same kind of lemonade Same amount of

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lemons sugar and water in each same colored cup In

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reality though Jill's differentiated her product by making it raspberry

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lemonade Joe has added extra sugar for the sweet tooth

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crowd and Sami is playing the organic card when there's

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differentiation in products that makes competition imperfectly Since firms air

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signalling to customers why their specific product is preferable to

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the other a similar ones This commonly seen type of

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imperfect market structure a market selling differentiated products is called

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monopolistic competition Okay too in perfect competition all firms are

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priced takers That is when firms are priced takers they

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are at the mercy of the price set by the

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market in the Maple Street lemonade market While that would

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mean Jill Joe and Sami's identical lemonades would all sell

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for the same amount it's called one dollars Exactly If

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Joe tried to raise the price of his lemonade to

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a dollar and a quarter consumers would leave him entirely

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and just go by Jill or Se Mi's lemonade instead

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which would put Joe while pretty much out of it

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Remember they're all selling the exact same stuff in a

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perfectly competitive market In reality Joe is charging a dollar

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and a quarter And while he's still in business Jos

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clientele are willing to pay that extra quarter for that

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extra sugar high And Sami's organic crowd followers are loyal

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right his lemonades even more expensive than Jos at two

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dollars But it sells just fine because Sami's consumers only

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wanna buy organic will Jail still gets her fair share

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of customers too because well there's a niche market for

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raspberry lemonade These kiddos are all making their own prices

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with their differentiated lemonade rather than being at the mercy

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of the markets deemed price right total pure price takers

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Next up Three buyers know all of the details on

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products and prices in perfectly competitive markets That's how buyers

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enforce perfect competition They'LL put anyone out of business by

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not buying from them if they confined the same product

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for a better deal elsewhere Think about how Joe would

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run himself out of business if he was selling the

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same lemonade as the others at a higher price Right

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Remember that Well in the real world buyers don't have

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perfect information We have what marketers tell us on they

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may or may not be over selling their wares G

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What marketer doesn't lie to you And we have things

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like online reviews you know many of which are fake

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And then we have recommendations from friends and we have

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yelp We can comparison shop products and their prices In

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reality Thank you Internet With all the technology we have

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nowadays well it's given us access toe wave or information

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than ever before And it's also given us access to

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more products and services than ever before right Okay so

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moving on number four In a market with perfect competition

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there are no barriers to enter and no barriers to

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exit the market In the lemonade market Any kid could

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open up a lemonade stand with essentially no startup costs

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And if the market was too competitive while any kid

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would close their lemonade stand without worrying about trying to

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stick it out you know since they already had bought

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all their lemonade making paraphernalia When markets are easy to

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enter and exit keeps firms as price takers they're at

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the mercy of the market If the lemonade kids air

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you know business owners created in Olongapo Lee deciding to

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collude on price wealth new lemonade stands would pop up

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and an undercut their plan Like for example if Jill

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Joe and Sammy all agreed to sell their identical lemonade

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at Buck fifty instead of buck wealth and new kids

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on the block Jake Jordan and Sarah might all open

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their own lemonade stands being competitors charging one dollars per

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drink instead of that buck Fifty Guess what Well then

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Jill Joe and Sammy would then either have to lower

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their prices back to a dollar or they go out

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of business Right Number five There are only small firms

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and perfectly competitive markets Definitely no oligopolies monopolies or uh

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well Amazon which would mean Jill Joe and Sammy all

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have a small share of the regular old lemonade market

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There's no dominant player in the real world Firms are

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incentivized to grow since it usually means they can benefit

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from increasing returns to scale making more with less So

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for example in the real world Jill's Raspberry Lemonade is

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able to sell at a lower price because she owns

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about half of the lemonade market on Maple Street But

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in actuality Jill ran Jeannie's raspberry lemonade stand out of

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business because while Jill was selling her raspberry lemonade at

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a lower price than Jamie could afford Teo make hers

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You know like how Wal Mart Target Costco and other

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big corporations ran their smaller mom and pop shop competitors

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out of business When there are a few firms or

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one big one in a market it's typically when they

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become old apples or monopolies which makes them Franks makers

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instead of price takers right So to recap perfect competition

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is hypothetical market structure where one there's no differentiation in

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products to firms are priced takers not makers Buyers have

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complete information There are no barriers to enter or exit

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the market as a seller And five all firms are

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small and modest Commodity markets like grain and oil are

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the closest things we have in real life too Perfect

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competition There's not too much differentiation happening there and buyer

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information is more complete in those markets than in most

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We can use the concept of perfect competition to analyze

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what's happening in imperfectly competitive markets And you know the

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rationale behind all that while perfect competition sounds great for

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consumers since it prevents price setting by firms of the

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real world isn't all that bad Differentiation is great We

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wouldn't have Coke and Pepsi and rotten Apple otherwise and

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economies of scale can make prices even lower than before

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A world with complete information would be also nice but

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sometimes life hands you lemons and well you've got to

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know how to squeeze the juice out of them So

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good luck with that

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