Copyright

Imperfect Competition in Economics: Definition & Examples

Imperfect Competition in Economics: Definition & Examples
Coming up next: What is a Monopoly in Economics? - Definition & Impact on Consumers

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:00 Imperfect Competition
  • 0:49 Perfect Competition
  • 2:26 Monopoly
  • 3:09 Monopolistic Competition
  • 3:56 Oligopoly
  • 5:03 Market Structures
Add to Add to Add to

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Beth Loy

Dr. Loy has a Ph.D. in Resource Economics; master's degrees in economics, human resources, and safety; and has taught masters and doctorate level courses in statistics, research methods, economics, and management.

This lesson explains the economic concept of imperfect competition. The assumptions for perfect competition are summarized and the most common types of imperfect competition (pure monopoly, monopolistic competition, and oligopoly) are illustrated.

Imperfect Competition

At the most basic level of an economy, we have markets. A market is simply a situation where people are engaged in buying and selling goods and services, also called outputs. It does not need to be a physical place and money does not need to be exchanged. As long as something is given in exchange for something else, a market exists.

Within a market, some type of competition exists, making it a competitive market. A competitive market means that there are a large number of buyers and sellers of the same output. Competitive markets involve either perfect or imperfect competition. Imperfect competition is the most common type of market structure. By definition, imperfect competition is one that lacks a condition needed for perfect competition.

Perfect Competition

Perfect competition, also called pure competition, exists in a market if the following key factors are met:

  • Buyers and sellers are price takers. A price taker is an entity or person that has no control over the price of a product.
  • Companies sell homogeneous products. Homogenous products are ones that are virtually identical.
  • Buyers and sellers have complete information. Complete information means that all buyers and sellers have perfect knowledge of the market, including all relevant information to set the price, create the product, and make the best decisions.
  • Each company only owns a small market share. Market share is the percentage of the total market owned by a company.
  • The market has no barrier of entry. A barrier of entry is something that exists to make it difficult for a company to enter a market. Examples of barriers of entry include patents, sole control of a scarce input, and government restrictions.
  • The market has no barrier to exit. A barrier to exit is something that exists to make it financially impossible for a company to exit a market. Existing contracts, union agreements, and regulations all act as a barrier to exit.

It is worth noting that perfect competition is unattainable, meaning it is impossible for a market to meet all of these key factors. It is, however, a valuable standard by which we can judge all types of imperfect competition. The most common examples of imperfect competition are monopoly, monopolistic competition, and oligopoly.

Monopoly

A monopoly is a market structure with one seller and multiple buyers. The seller is a price maker that has created large barriers to enter the market. A classic example of a monopoly is AT&T. The company was the first to develop a long-distance communication structure. As a result, there was not any other company that sold the same goods and services.

As AT&T purchased most of the smaller telephone companies in existence, it became the strongest and most viable company in telecommunications. The company was then able to control pricing and create huge barriers to entry. This continued until 1984 when the U.S. Department of Justice forced the company to split into several smaller companies.

Monopolistic Competition

Monopolistic competition is a market structure with many competitors who each own a small market share and sell a slightly different good or service. There are no barriers to entry and exit. In monopolistic competition, companies set their own prices and find a way to uniquely distinguish their product. This product could be of different quality, from a unique location, marketed and packaged for a niche, or distributed differently.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create An Account
Support