Imperfect Competition Market – Monopoly, Monopolistic, and Oligopoly | New Topic [2024]

In this note, we will discuss about the Imperfect Competition Market and its Structure like – Monopoly, Monopolistic, and Oligopoly Market. Welcome to Poly Notes Hub, a leading destination for Engineering Notes.

Author Name: Arun Paul.

What is Imperfect Competition Market?

Imperfect competition market refers to market systems that are between perfect competition and monopoly. In an imperfectly competitive market, there are several vendors or buyers, but each has some level of market power, allowing them to influence prices. Product differentiation, entrance obstacles, and control over important resources are all potential sources of market dominance.

Factors of Imperfect Competition Market

Factors contributing to imperfect competition in a market include –

1. Product differentiation: When firms produce goods or services that are perceived as unique or different from competitors, they can exert some control over prices.
2. Barriers to entry: Factors such as high startup costs, exclusive access to resources, patents, or government regulations can limit new firms from entering the market, allowing existing firms to maintain market power.
3. Economies of scale: Larger firms may benefit from lower average costs of production, making it difficult for smaller firms to compete on price.
4. Advertising and branding: Investment in advertising and branding can create perceived differences between products, allowing firms to charge higher prices.
5. Limited information: In some markets, consumers may not have perfect information about prices, quality, or alternatives, allowing firms to exert pricing power.

Types of Imperfect Competition Market

There are three types of Imperfect Competition –

1. Monopoly Market

In a monopoly market, there is only one seller or provider of a specific product or service. In other terms, a monopoly occurs when a single corporation controls the whole market and has no direct competition. This offers the monopolist considerable market power, allowing them to set prices and output levels without fear of competition undercutting them.

Example of Monopoly Market: One example of a monopoly market is the De Beers Group in the diamond industry. For many years, De Beers held a near-monopoly on the diamond supply, controlling around 80% of the global diamond production.

Key characteristics of a monopoly market include:

1. Single seller: There is only one firm supplying the entire market with a specific product or service.
2. Unique product: The monopolist typically offers a product or service that has no close substitutes, giving them complete control over its pricing and distribution.
3. High barriers to entry: Barriers such as patents, exclusive access to resources, economies of scale, or government regulations make it extremely difficult for other firms to enter the market and compete.
4. Price maker: As the sole provider in the market, the monopolist has the ability to set prices at a level that maximizes their profits, without needing to consider competition.
5. Potential for supernormal profits: Because monopolies face no competition, they can potentially earn significant profits in the long run, especially if demand for their product or service is inelastic (not highly responsive to price changes).

2. Monopolistic Market

A monopolistic market is one in which a large number of sellers sell comparable but differentiated products. In a monopolistic market, each seller has some degree of market power due to product differentiation, branding, or other considerations, but firms nevertheless compete with one another. This market arrangement is between perfect competition and monopoly.

Example of Monopolistic Market: One example of a monopolistic market is the market for fast food restaurants. In this market, there are many different sellers (fast food chains) offering similar but differentiated products. Each fast food chain has its own brand, menu, and advertising campaigns, which distinguish it from competitors.

Key characteristics of a monopolistic market include:

1. Many sellers: There are numerous firms operating in the market, each producing a slightly different version of the product.
2. Product differentiation: Sellers in a monopolistic market differentiate their products through branding, quality, design, or other features to make them appear unique compared to competitors’ offerings.
3. Some degree of market power: While each firm in a monopolistic market has some control over its price due to product differentiation, it faces competition from other firms offering similar products.
4. Freedom of entry and exit: Firms can enter or exit the market relatively freely, although there may be some barriers to entry such as brand loyalty, advertising costs, or economies of scale.
5. Non-price competition: Competition in monopolistic markets often revolves around non-price factors such as advertising, product design, customer service, and branding rather than solely on price.

3. Oligopoly Market

An oligopoly market is one in which a few major enterprises dominate the industry. In an oligopoly, these firms wield enormous market power, and their actions directly affect market conditions such as prices and output levels. Oligopolistic markets are prevalent in industries such as automobile manufacture, telecommunications, and aviation.

Example of Oligopoly Market: The global automobile market is dominated by a small number of large companies, including Toyota, Volkswagen Group, General Motors, Ford, and others. These firms collectively hold a significant share of the market.

Key characteristics of an oligopoly market include:

1. Few large firms: There are only a small number of firms operating in the market, each of which has a considerable market share. These firms are interdependent and closely monitor each other’s actions.
2. High barriers to entry: Barriers such as economies of scale, control over key resources, patents, and government regulations make it difficult for new firms to enter the market and compete with established oligopolistic firms.
3. Mutual interdependence: The actions of one firm in an oligopoly have a significant impact on the others. Firms must carefully consider their rivals’ responses when making decisions about pricing, output, marketing, and product development.
4. Non-price competition: Oligopolistic firms often compete through non-price factors such as advertising, branding, product differentiation, and innovation rather than solely on price.
5. Potential for collusion: Oligopolistic firms may engage in collusion or tacit agreements to coordinate their actions and maximize profits. This collusion can take the form of price-fixing, market-sharing agreements, or other anti-competitive practices.