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PERFECT AND IMPERFECT

COMPETITION
A presentation for Managerial
Economics

Perfect Competition: It is a form of market. Price fixed by the industry. no firm can affect the price by its individual efforts. An industry comprise group of different firms producing the same products. in which large number of sellers sells a homogenous product to buyers. i. INTRODUCTION Market : The market is a place where buyers and sellers meet each other to effect a business transaction In economic sense. . Firm produces only a small portion of the total output produced by the whole industry.e. settle the price and transact their business. buying and selling of products. market is a system in which buyers and seller bargain for price of product.

They can sell output only at the price fixed by the industry. In such cases price of the commodity is the same at every place. • All the firms must sell completely homogenous or identical goods. Features of Perfect Competition : 1. 2. 3. Homogenous Product: • Most essential features of perfect competition. 4. Free entry and Free exit of firms: • Complete freedom for items to enter into or leave whenever they choose to do so. Large Number of Buyers and Sellers : • There are large number of buyers and sellers under perfect competition. Absence of Artificial Restrictions: .Firm is only a price taker and not a price maker. • Fresh product can enter the market if some product incurred loses and leave the market. • The price of the commodity is determined by the combined actions of all the sellers or firms and buyers in the market.

supplies . Perfect Mobility: • In perfect competition goods. Non Existence of Transport Costs and Selling Costs: • Perfect competition assumes that the various firm work so close to each other that there are no transport costs as well as the selling costs because everyone is selling an identical product. 5. Perfect knowledge of the Market to Both Buyers and Sellers: • There must be perfect knowledge on the part of buyers and sellers about market condition. Imperfect Competition: . 7. • Factors of production can move easily for smooth functioning of the market. • There should be non-existence of any artificial restrictions on the demands . • There must be no governmental or institutional fixation of the prices of goods and factors of production. sources as well as resources are perfectly mobile between firms. 6.prices of goods and factors of production in the market. • No necessary to spent on advertisement as buyers knows the worth of each product.

5. Depending on the number of sellers operating in the market . Monopolistic Competition. Buyers and Sellers do not possess perfect knowledge and the products sold are no more homogenous.imperfect competition is further classified : 1. Duopoly 3.In the 20th century . Oligopoly. The number of buyers and sellers is also small. Monopsony OLIGOPOLY Meaning Oligopoly is a situation a few large firms compete against each other and there is an element of interdependence in the decision – making of these firms. Monopoly. 2.markets all over the world have become imperfect on account of several factors.” Any decision one firm makes will affect the trade of the competitors and so result in . 4. Each firm in the oligopoly recognizes this interdependence.

Collusion reduces degree of competition. and this must be taken account of when decisions are made.” A major policy change on the part of one firm will have obvious and immediate effects on its competitors. one’s competitor’s behavior depends on one’s own behavior. The element of interdependence of firms has made the formulation of systematic analysis of oligopoly very difficult.countermoves. . So. The interdependence makes predictions difficult and. by reducing competition. and thus enables firms to increase profits by acting monopolistically: 2. Collusion. To play this game. thus. 3. Due to the following reasons an oligopoly situation may invite collusion among firms in the industry: 1. Collusion may help in restricting entry of new firms into the industry. The competitors are taken likely to react with their counter – policies. As a result. reduces the uncertainty associated with rivals moves and countermoves. makes it very cumbersome to reach at any optimal decisions. the oligopolists have to be equipped with the both the aggressive and defensive marketing weapons. a game of moves and countermoves begin between the rivals.

the oligopolist is not dependent to take his decisions. his policies have a noticeable impact on market-mainly on the industry price and output.Main Features of Oligopoly 1. Interdependence Unlike perfect competition and monopoly. The oligopoly firm has to take into consideration the actions and reactions of his rivals while determining its price . electronic industry etc. Due to the extent of influence of each seller. 2. We can find this kind of market situation in automobile industry. Small number of large numbers The number of sellers dealing in a homogeneous or differentiated product is small and each seller and seller is catering to a significant part of the market demand.

So price rigidity will prevail. the firm in oligopoly normally sticks to its price. Advertising Given high cross – elasticity of demand for products and price rigidity in oligopoly. thus. 4. Also. Hence. as each product will have some loyal customers. Existence of price rigidity Since any change in price by an oligopolist invites countermoves from its rivals. The cross – elasticity of demand is very high between the products of the oligopolists because the products are close substitutes. Presence of monopoly element So long as products are differentiated the firms enjoy some monopoly power. If a firm which has reduced the price. will not allow it to take any advantage nof price reduction. when firms collude with each other they can work together to rise the price and earn some monopoly income. 3. 5. and output policies. its rivals also do so and. If a firm tries to reduce the price. the only way to open to the . the firm would not try to either to reduce or raise the price.

Entry of firms : On the basis of possibility of entry of new firms. Usually. If the product the industry are homogeneous. Bases for classification 1. It is rare to find pure oligopoly situations. advertisement as well as variations in design or quality of the product are both used simultaneously to maintain and increase the market share of an oligopoly firm. Advertisement expenditure is used as an effective tool in his direction – this expenditure is aimed primarily at shifting the demand in favor of the product. 2. While if the firm in the industry produce differentiated products which are close substitutes. we may classify the oligopoly situation as open or closed. Product differentiation : On the basis of product differentiation. we call this situation as imperfect or differentiated oligopoly. oligopoly may be classified into perfect and imperfect oligopoly. the oligopoly is called the perfect or pure oligopoly.oligopolist is to rise his sales by either advertising his product or improving the quality of his product. .

while the latter is a tacit collusion. Partial oligopoly refers to a situation where one large firm dominates the industry and the other firms follow the leader with regard to the policy of bthe price fixation. the new firms are free to enter the industry. On the other hand. The collusion may be in the nature of an agreement or an understanding between the firms. The former is called open collusion. the firms may be acting independently: that is. 3. instead of competing with each other. is called collusive oligopoly. Full oligopoly. while in case of the latter a few large firms dominate the market and new firms do not have a free entry into the industry. exists where no firm is dominant enough to take the role of a price leader. Price leadership : The oligopoly situation can be classified as partial or full oligopoly. depending upon the presence or absence of a price leader. Agreement between firms : A situation where the firms. follow a common price policy. In case of the former. there is no agreement or . 4. on the other hand.

Such a situation is known as non – collusive oligopoly.understanding between oligopoly firms. .