PERFECT AND IMPERFECT

COMPETITION
A presentation for Managerial
Economics
 INTRODUCTION
Market :

The market is a place where buyers and sellers meet each other to
effect a business transaction
In economic sense, market is a system in which buyers and seller
bargain for price of product, settle the price and transact their
business, i.e. buying and selling of products.

Perfect Competition:

It is a form of market, in which large number of sellers sells a

homogenous product to buyers.
Firm produces only a small portion of the total output produced by
the whole industry. An industry comprise group of different firms
producing the same products. Price fixed by the industry, no firm
can affect the price by its individual efforts.
Firm is only a price taker and not a price maker. They can sell
output only at the price fixed by the industry. In such cases price of
the commodity is the same at every place.

Features of Perfect Competition :

1. Large Number of Buyers and Sellers :

• There are large number of buyers and sellers under perfect
competition.
• The price of the commodity is determined by the combined
actions of all the sellers or firms and buyers in the market.

2. Homogenous Product:
• Most essential features of perfect competition.
• All the firms must sell completely homogenous or identical
goods.
3. Free entry and Free exit of firms:
• Complete freedom for items to enter into or leave whenever
they choose to do so.
• Fresh product can enter the market if some product incurred
loses and leave the market.
4. Absence of Artificial Restrictions:
 • There should be non-existence of any artificial restrictions on
the demands , supplies ,prices of goods and factors of
production in the market.
• There must be no governmental or institutional fixation of the
prices of goods and factors of production.

5. Perfect knowledge of the Market to Both Buyers and Sellers:

• There must be perfect knowledge on the part of buyers and
sellers about market condition.
• No necessary to spent on advertisement as buyers knows the
worth of each product.

6. Perfect Mobility:
• In perfect competition goods, sources as well as resources
are perfectly mobile between firms.
• Factors of production can move easily for smooth
functioning of the market.
7. Non Existence of Transport Costs and Selling Costs:
• Perfect competition assumes that the various firm work so
close to each other that there are no transport costs as well as
the selling costs because everyone is selling an identical
product.
Imperfect Competition:
In the 20th century ,markets all over the world have become
imperfect on account of several factors.
Buyers and Sellers do not possess perfect knowledge and the
products sold are no more homogenous. The number of buyers and
sellers is also small.
Depending on the number of sellers operating in the market
,imperfect competition is further classified :
1. Monopoly.
2. Duopoly
3. Oligopoly.
4. Monopolistic Competition.
5. Monopsony

OLIGOPOLY

Meaning

Oligopoly is a situation a few large firms compete against

each other and there is an element of interdependence in the
decision – making of these firms. Each firm in the oligopoly
recognizes this interdependence.” Any decision one firm makes
will affect the trade of the competitors and so result in
countermoves. As a result, one’s competitor’s behavior depends
on one’s own behavior, and this must be taken account of when
decisions are made.” A major policy change on the part of one
firm will have obvious and immediate effects on its competitors.
The competitors are taken likely to react with their counter –
policies. So, a game of moves and countermoves begin between
the rivals. To play this game, the oligopolists have to be equipped
with the both the aggressive and defensive marketing weapons.

The element of interdependence of firms has made the

formulation of systematic analysis of oligopoly very difficult. The
interdependence makes predictions difficult and, thus, makes it
very cumbersome to reach at any optimal decisions.

Due to the following reasons an oligopoly situation may

invite collusion among firms in the industry:
1. Collusion reduces degree of competition, and thus enables
firms to increase profits by acting monopolistically:
2. Collusion may help in restricting entry of new firms into the
industry.
3. Collusion, by reducing competition, reduces the uncertainty
associated with rivals moves and countermoves.
Main Features of Oligopoly

1. Small number of large numbers

The number of sellers dealing in a homogeneous or
differentiated product is small and each seller and seller
is catering to a significant part of the market demand.
Due to the extent of influence of each seller, his
policies have a noticeable impact on market-mainly on
the industry price and output. We can find this kind of
market situation in automobile industry, electronic
industry etc.

2. Interdependence
Unlike perfect competition and monopoly, the
oligopolist is not dependent to take his decisions. The
oligopoly firm has to take into consideration the actions
and reactions of his rivals while determining its price
 and output policies. The cross – elasticity of demand is
very high between the products of the oligopolists
because the products are close substitutes.

3. Existence of price rigidity

Since any change in price by an oligopolist invites
countermoves from its rivals, the firm in oligopoly normally
sticks to its price. If a firm tries to reduce the price, its rivals
also do so and, thus, will not allow it to take any advantage nof
price reduction. If a firm which has reduced the price. Hence,
the firm would not try to either to reduce or raise the price. So
price rigidity will prevail.

4. Presence of monopoly element

So long as products are differentiated the firms enjoy
some monopoly power, as each product will have some loyal
customers. Also, when firms collude with each other they can
work together to rise the price and earn some monopoly income.

5. Advertising
Given high cross – elasticity of demand for products
and price rigidity in oligopoly, the only way to open to the
oligopolist is to rise his sales by either advertising his product or
improving the quality of his product. Advertisement expenditure
is used as an effective tool in his direction – this expenditure is
aimed primarily at shifting the demand in favor of the product.
Usually, advertisement as well as variations in design or quality
of the product are both used simultaneously to maintain and
increase the market share of an oligopoly firm.

Bases for classification

1. Product differentiation :
On the basis of product differentiation, oligopoly may
be classified into perfect and imperfect oligopoly. If the
product the industry are homogeneous, the oligopoly is
called the perfect or pure oligopoly. While if the firm in
the industry produce differentiated products which are
close substitutes, we call this situation as imperfect or
differentiated oligopoly. It is rare to find pure oligopoly
situations.
2. Entry of firms :
On the basis of possibility of entry of new firms, we
may classify the oligopoly situation as open or closed.
 In case of the former, the new firms are free to enter the
industry, while in case of the latter a few large firms
dominate the market and new firms do not have a free
entry into the industry.

3. Price leadership :
The oligopoly situation can be classified as partial or
full oligopoly, depending upon the presence or absence
of a price leader. Partial oligopoly refers to a situation
where one large firm dominates the industry and the
other firms follow the leader with regard to the policy
of bthe price fixation. Full oligopoly, on the other hand,
exists where no firm is dominant enough to take the
role of a price leader.

4. Agreement between firms :

A situation where the firms, instead of competing with
each other, follow a common price policy, is called
collusive oligopoly. The collusion may be in the nature
of an agreement or an understanding between the firms.
The former is called open collusion, while the latter is a
tacit collusion. On the other hand, the firms may be
acting independently: that is, there is no agreement or
understanding between oligopoly firms. Such a
situation is known as non – collusive oligopoly.