Distinguish between perfect competition and imperfect competition.
Perfect competition occurs when all the firms within the industry have a small share of the market or the market is almost equally split among the different entities. In imperfect competition some of the firms control a larger portion of the market compared to other firms in the same industry.
In perfect competition, no single firm can influence the market price and all the firms are price takers. In imperfect competition, a small number of the firms or even a single firm may control or influence the market prices.
In perfect competition, the firms do not focus on differentiating their products or services and their products remain identical. In imperfect competition, the firms sell highly differentiated products and services.
In perfect competition, the firms are free to enter or exit the market, which means a few trade barriers exist. In imperfect competition, entry and exit from the market are highly restricted due to the high level of trade barriers, which may include capital requirements and government policies.
In perfect competition, the buyers are well informed about the firm’s operations and products. In imperfect competition, access to such information may be restricted.
There is no single market structure known as "imperfect competition," so we must distinguish here between perfect competition and all other market structures.
The truly unique thing about perfect competition is that firms in such a market have no control over the price they can charge and can make no economic profit. Outside of that, all characteristics of perfect competition are shared by at least one other market structure. There can be many competitors in monopolistic competition and it is easy to enter or exit such a market. Firms in an oligopoly can sell homogeneous products. What is unique to perfect competition is that all of these conditions are present, making it impossible to make economic profit.
There are two types of competition: perfect and imperfect competition. Imperfect competition has four different forms: monopolies, monopolistic competition, oligopolies, and duopolies. Since imperfect competition has four different forms it cannot truly be compared as a whole to perfect competition. But it must be noted that each form of imperfect competition differs from at least one of the characteristics of perfect competition.
The Features of Perfect Competition
1. Government does not interfere in their market operations - this is not so for monopolies.
2. There are large numbers of relatively small buyers and sellers, so no one seller or buyer can materially influence the supply of goods on a market or the prices of goods on a market - this is not true for all imperfect competition firms which generally are few in number and have large shares in the market.
3. The goods are homogenous (for example, agricultural products) - this is not true for all imperfect competition firms which generally are differentiated by branding.
4. Participating firms have the freedom to enter and exit the market - this is not true for monopolies and some duopolies which have barriers to entry.
Perfect competition describes a market whose suppliers are too small to affect the market price, that has a fairly large number of buyers and sellers, and has no entry and exit barriers. Suppliers offer the same goods and information on pricing and products are easily available. Any departure from perfect competition refers to imperfect competition. There are several forms of imperfect competition:
- oligopoly: presence of only a few sellers
- monopolistic: many sellers of highly distinctive products
- monopsony: many sellers, one buyer
- oligopsony: many sellers, few buyers
In the case of imperfect competition, firms or sellers will be able to dictate the price of a good and all the suppliers may offer different goods. The buyer-seller equilibrium available in the perfect competition is non-existent here. Also, perfect competition is mostly non-existent and the market is defined by some form of imperfect competition.