Imperfect competition (what it is, characteristics, causes and classification)

The imperfect competition, is a situation that occurs in a given market when demand and supply law are used incorrectly, due to that the seller or buyer only has the ability to influence the prices of products and services within the market.

Companies in this type of market situation, tend to limit the supplies of products, of such that the fewer organizations there are in the market, the greater the influence on the prices. The same happens when there are fewer demanders, since they are able to control the supply because their sales will depend on them.

Within the markets where there is a imperfect competition, sellers or companies face a negative demand curve. This means that if a seller decides to increase the quantity of products offered, the price will fall.

Characteristics of imperfect competition

In this type of competition, the following characteristics can be seen that can differentiate this type of market from others:

• It is made up of a small number of companies, which allow a small type of market that contains low levels of production.
• Sellers are mostly those who have the ability to influence product prices, which are usually quite high.
• The products offered within the markets of this type of competition are considered different for consumers.
• Both sellers and buyers acquire different information regarding the products, they handle it differently.
• They lack the freedom for new sellers to enter the market.

Causes of imperfect competition

The main causes for this type of competition are:

• Production costs: Large companies, because they have favorable infrastructures, have lower production costs, the productions of small businesses find it difficult to face their prices and allows imperfect competition in the market.
• Entry barriers: These hinder competition and promote industrial concentration. They also arise when legal restrictions and product differentiation lower the number of competitors.
• Advertising: It can alter the equality of the product of the different producers and manages to modify the knowledge that buyers have of the products and thus would only favor some producers.

Consequences of imperfect competition

At first this situation is not desirable, since governments allow certain policies to achieve guarantee competition and establish which behaviors are competencies that do not harm the consumer.

On the other hand, there are situations where this competition is usually very efficient, even when it requires regulation or if it is a public company. It could happen that in the market there is only one company that can take advantage of the scales of the economy that allow it to be much more efficient to compete in the market for the quantity produced.

This type of situation is known as a natural monopoly, it is a situation that mostly belongs to the state or is closely regulated, because of who is always looking for a way to reduce production or increase prices, which would be of great benefit to him as a producer, but could harm the consumer.

Classification of imperfect competition

Within this concept you can find various types, some of them are:

Monopoly

Here a single product can control the entire market and the price will depend on the decrease or increase in production. It is a market situation that rarely becomes total or absolute and arises because of market failures or legal privilege.

Oligopoly

It is generated when the market is managed by a small number of people who can obtain results directly and indirectly from the merchandise that is produced.

Monopsony

This occurs when there is only one buyer and a large number of sellers in the market. It does not have any type of equilibrium in the law of supply and demand. It can be said that it is a commercial situation where there is a plaintiff for a product or service.

Oligopsony

This market model allows this type of competition, when it is the buyers who have the power to control the purchase conditions and prices within the market.

In the imperfectly competitive markets, companies can influence the price offered by the products or the limitation of supplies so that the smaller the number of existing companies, the greater their ability to influence the prices. Due to this, the different market models of these competencies are classified according to the number of participating companies.