Robinson and Imperfect Competition

Joan Violet Robinson

Joan Violet Robinson (31 October 1903 – 5 August 1983) was a British economist well
known for her wide-ranging contributions to economic theory. She was a central figure
in what became known as post-Keynesian economics.
In 1933, her book The Economics of Imperfect Competition, Robinson coined the term
"monopsony," which is used to describe the buyer converse of a seller monopoly.
Monopsony is commonly applied to buyers of labor, where the employer has wage
setting power that allows it to exercise Pigouvian exploitation and pay workers less than
their marginal productivity. Robinson used monopsony to describe the wage gap
between women and men workers of equal productivity.
In economics, a monopsony is a market structure in which a single buyer substantially
controls the market as the major purchaser of goods and services offered by many
would-be sellers. The microeconomic theory of monopsony assumes a single entity to
have market power over all sellers as the only purchaser of a good or service. This is a
similar power to that of a monopolist, which can influence the price for its buyers in
a monopoly, where multiple buyers have only one seller of a good or service available
to purchase from.

Imperfect Competition
In economics, imperfect competition refers to a situation where the characteristics of an
economic market do not fulfil all the necessary conditions of a perfectly competitive
market. Imperfect competition will cause market inefficiency when it happens, resulting
in market failure. Imperfect competition is a term usually used to describe the seller's
position, meaning that the level of competition between sellers falls far short of the level
of competition in the market under ideal conditions.
Imperfect competition is a market structure in which sellers or buyers have market
power over prices, which prevents the market from operating under perfect competition.
Because they have market power, market participants are often in a position to abuse
their power, raise prices, and manipulate the market to secure higher profits.
  Characteristics of Imperfect Competition

 Market power

Sellers have market power and some control over prices, ranging from some power
(monopolistic competition) to absolute (monopoly). Sources of market power can come
from a firm’s ability to differentiate between supply (product differentiation) or influence
supply.

 Market entry and exit barriers

Entry and exit barriers are low in monopolistic competitive markets. It increases when
the market operates under oligopoly and monopoly.

Barriers to entry prevent the market from becoming highly competitive, thereby reducing
market profits. Conversely, when the barriers to entry are low new players can easily
enter. New players bring additional supply to the market, pushing prices down.

 Imperfect information

Under imperfect competition, there is no full disclosure of information about prices and
products. Information asymmetry is present in the market. Few companies are better
informed than their customers or competitors. They can use such information to pursue
their own advantage.

 Heterogeneous product

Competing manufacturers offer heterogeneous products. They act as close substitutes

rather than perfect substitutes. Each product has slightly (or even wholly) different
features and qualities, allowing buyers to prefer products from one company over
another.

 Price maker

Because they have price power, producers act as price makers. They can charge a
price that is higher than the marginal cost. The more significant the difference between
the two, the higher their profit.
  Conditions of Imperfect Competition
If ONE of the following conditions are satisfied within an economic market, the market is
considered "imperfect":

 The market's goods and services are heterogeneous or differentiated. This means
that firms can charge higher prices as their goods and services are perceived as
better;
 The market contains ONE seller or none;
 There are barriers to market entry and exit. If there are barriers to market entry and
exit, there may be special costs to a firm that may prevent or make it difficult for a
firm to enter or exit an industry market. Additionally, if prices are different, buyers
may not have the ability to easily switch suppliers and thus, suppliers cannot easily
exit or enter the market; and
 Market firms are NOT price takers and hence, have some control over the pricing of
their goods and services.

 Types of Imperfect Competition

As long as perfect competition conditions are not met, the market operates on the
imperfect competition. This market can take a variety of types, including:

 Monopoly. The market consists of one producer (seller or supplier) and has many
buyers (consumers).

Market consists of only one company. Other characteristics of the monopoly market are:

- Monopolist determines the output, price, and quality of market products.

- Market has no substitutes, leaving consumers unable to switch.
- Barriers to entry are high, so the threat of additional supplies from new entrants
is minimal.
Ex. Natural gas, electricity companies, and other utility companies are examples of
natural monopolies.
- Microsoft
- Mercalco
 Oligopoly. The market consists of several players and serves many buyers. The fewer
the number of players, the greater the market power. If the market consists of two
producers, we call this a duopoly.

In this market, several players serve many buyers. The number of firms is more than
one firm but less than the number of players in the monopolistic competition market.
Some producers usually dominate and control a higher market share compared to other
players.
 Furthermore, under oligopoly, companies have strategic dependence. When a dominant
firm changes the production quantity or price, it will affect other players and the overall
market conditions. Strategic dependence is higher if the number of firms is smaller.

Ex. Some examples of oligopolies include the car industry, petrol retail, pharmaceutical
industry, coffee shop retail, and airlines. In each of these industries, a few large
companies dominate.

- Toothpaste industry

 Monopolistic competition. This market structure is similar to perfect competition in

that it consists of many players and many buyers.

Monopolistic competition is similar to perfect competition. The market comprises many

producers, each of which is similar in size and relatively small. Therefore, they cannot
influence prices by changing output. Entry and exit barriers are also low.

In this case, differentiation is the factor that differentiates monopolistic and perfectly
competitive markets. The product on the market acts as a close substitute. Producers
will differentiate their offerings, making consumers prefer products from one producer
over other products.

Ex. Restaurants, hair salons, household items, and clothing are examples of industries
with monopolistic competition. Items like dish soap or hamburgers are sold, marketed,
and priced by many competing companies.

- Starbucks
- Nike
 Monopsony. Many producers operate in the market, and they serve one buyer. This is
the opposite of a monopoly.

Under monopsony, many sellers serve a single buyer. In other words, the demand from
one buyer represents market demand.

As a consequence, buyers have significant bargaining power over sellers. They will bid
a lower price than what happens in a competitive market. Or, they will ask for a higher
quality product, increasing the costs of the sellers.

Ex. The classic example of a monopsony is a company coal town, where the coal
company acts the sole employer and therefore the sole purchaser of labor in the town.

 Oligopsony. This market structure is the opposite of oligopoly. The market is made up
of many producers serving few buyers.
 In this market structure, many sellers serve a few buyers. Therefore, buyers have high
bargaining power over sellers, although not as high as in the case of monopsony.
Buyers can take advantage of their power to negotiate lower prices and higher quality.

The agricultural sector in developing countries is a comparative example of an

oligopsony. The market consists of many farmers who supply various agricultural
commodities such as corn, rice, and vegetables, to only a few middlemen or companies.

- Plane

 Bilateral monopoly. It is a combination of monopoly and monopsony because it

consists of only one seller and one buyer.

- Labor unions and large manufacturing corporations (especially in one-

company towns)