Difference Between Perfect and Imperfect Competition
The main difference between perfect competition and imperfect competition lies in the number of sellers and product differentiation. Perfect competition features many sellers offering identical products, leading to no single seller being able to influence market prices. In contrast, imperfect competition includes monopoly, oligopoly, and monopolistic competition with fewer sellers and/or products that are not identical. It allows sellers to have some control over prices.
The difference between perfect competition and imperfect competition is an important concept in economics, as it determines the behavior of buyers and sellers in different market structures. In a perfect competition scenario, there are many buyers and sellers, selling homogenous goods, where no single buyer or seller can influence the market price.
In contrast, in an imperfect competition scenario, there are a small number of buyers and sellers, selling differentiated goods, where firms have some degree of monopoly power to influence the market price. Understanding these differences is important for businesses and policymakers to develop effective strategies and policies that promote competition and protect consumers.
Let's understand the most essential differences between perfect and imperfect competition.
Table of Content
- Comparative Table: Perfect and Imperfect Competition
- What is Perfect Competition?
- What is Imperfect Competition?
- Difference Between Perfect Competition and Imperfect Competition
Comparative Table: Perfect and Imperfect Competition
| Aspect |
Perfect Competition |
Imperfect Competition |
| Number of Firms |
Many small firms |
Few to many firms, depending on the market structure |
| Type of Products |
Homogeneous (identical) |
Differentiated (unique features) |
| Control Over Prices |
None (price takers) |
Some to significant (price makers) |
| Barriers to Entry and Exit |
None |
Significant (e.g., patents, high startup costs) |
| Market Information |
Complete and freely available |
May be incomplete or asymmetric |
| Profit in the Long Run |
Normal profit (zero economic profit) |
Possible economic profits |
| Examples |
Agricultural products, stock markets |
Technology companies, branded consumer goods |
| Consumer Choice |
High (due to identical products) |
Varied (due to product differentiation) |
| Efficiency |
Allocative and productive efficiency achieved |
Often results in allocative and productive inefficiencies |
| Decision Making |
Decisions based on market prices |
Strategic decision-making regarding pricing, output, and marketing |
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What is Perfect Competition?
Perfect competition is an idealized market structure characterized by many small firms, identical products, and no barriers to entry or exit. In this scenario, no single firm can influence the market price of goods; prices are determined purely by supply and demand. Consumers have complete information, and profits are normalized in the long run due to free entry and exit, ensuring no economic profit for firms but efficient resource allocation.
What is Imperfect Competition?
Imperfect competition describes market structures that do not meet the strict criteria of perfect competition. It includes monopolies, oligopolies, and monopolistic competition, where firms have some control over prices due to product differentiation, limited number of competitors, or barriers to entry. This results in higher prices and lower output compared to perfect competition. Consumers face fewer choices and potentially higher prices, while firms can achieve economic profits due to reduced competition and market power.
Difference Between Perfect Competition and Imperfect Competition
Perfect and imperfect competition are two types of market structures that exist in economics. The main differences between the two can be summarized as follows:
- Number of Market Players:
Perfect competition involves many buyers and sellers who deal in homogeneous goods. On the other hand, imperfect competition involves a small number of buyers and sellers who deal in differentiated goods.
- Control over Price:
In perfect competition, no individual buyer or seller has control over the price of the good, as the market forces of supply and demand determine the price. In imperfect competition, firms have some degree of control over the price, as they can manipulate the supply and demand of their differentiated product.
- Barriers to Entry:
Perfect competition has no barriers to entry, meaning new firms can easily enter the market and compete. In imperfect competition, entry barriers exist, such as patents, economies of scale, and high start-up costs, making it difficult for new firms to enter the market.
- Information Transparency:
Perfect competition assumes that all market players have perfect information about the market, including prices and quality. In imperfect competition, information is unequal, and firms may have an advantage over others.
- Profit Maximization:
In perfect competition, firms aim to maximize profits by producing at the point where marginal cost equals marginal revenue. In imperfect competition, firms aim to maximize profits by producing at the point where marginal revenue equals marginal cost. Still, they also have to consider the impact of their actions on their competitors.
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Top FAQs on Difference Between Perfect and Imperfect Competition
What is perfect competition?
Perfect competition is a market structure where numerous small firms sell identical products, and no single firm can influence market prices. It features free entry and exit, perfect information, and no economic profits in the long run due to competition.
What is imperfect competition?
Imperfect competition refers to market structures where firms have some control over prices due to product differentiation or market power. It includes various models like monopolistic competition, oligopoly, and monopoly, each with different levels of competition and market influence.
What are the key characteristics of monopolistic competition?
Monopolistic competition involves many firms selling similar but differentiated products. Each firm has some price-setting power due to product uniqueness. Key features include low barriers to entry, non-price competition, and some degree of market power.
How does an oligopoly differ from perfect competition?
An oligopoly is a market structure dominated by a few large firms, leading to significant control over prices and output. Unlike perfect competition, firms in an oligopoly are interdependent and may engage in collusion or competitive strategies to maximize profits.
What are the long-term outcomes in a monopoly compared to perfect competition?
In a monopoly, a single firm controls the market, setting higher prices and restricting output to maximize profits. Unlike perfect competition, where prices equal marginal cost and economic profits are zero in the long run, monopolies can sustain higher prices and profits due to barriers to entry.
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