Knowing the differences between perfect and imperfect competition is important for marketing firms, as it can help them decide which type of market environment to operate in and how best to allocate their resources. Understanding these differences helps businesses make strategic decisions that will maximise their profits.
There are two main types of markets – perfect competition and imperfect competition. Although these terms may sound familiar, do you really understand what separates them? In this blog post, we’ll explore the differences between perfect and imperfect competition.
What is a competitive market?
Firstly, what is a competitive market? A competitive market forms as a result of consumer demand. As is the case with marketing firms, all competitors offer homogenous goods and services, promoting healthy competition between one another.
What is perfect competition?
In an ideal world, firms wish to operate in a perfectly competitive market. Although a hypothetical market structure, perfectly competitive markets consist of many buyers and sellers, all of whom are making rational decisions with the same amount of knowledge and information. Firms in this example of market structure are price takers – they set prices of goods and services at market equilibrium level, which benefits consumers.
Perfect competition refers to a hypothetical market structure where there are numerous buyers and sellers of a specific product with no single participant holding a large market share. In such circumstances, all companies are operating on an equal footing with almost identical products and prices. For businesses, this can mean the market will regulate itself, with no single player able to influence the market prices. However, it is important to remember that no market in this world is or will be perfectly competitive, although some markets such as the farmer’s market are somewhat close.
What is imperfect competition?
An imperfect market refers to any economic market that does not meet the characteristics of a perfectly competitive market.
This market structure focuses more on reality. Although we wish to promote healthy competition, in truth that is the opposite of what is occurring in real life. Think of a large clothing brand for example, a firm with a sizable amount of market share within the fashion industry. Could a newly emerging clothing realistically compete with larger clothing brands if it wished to? The answer is no. Large firms could undergo predatory pricing and essentially wipe out these ‘smaller’ firms, creating a high barrier to market entry and exit.
The supermarket industry is one example of having imperfect competition. Their market power gives them the ability to set the market price as price makers.
Firms which operate in imperfect markets will have less need for marketing firms carrying out targeted campaigns, due to the absence of competitors, and so they will already have access to a large market share in the industry.
Market structures with imperfect competition
Monopoly
A monopoly occurs when a single firm has complete control over a market, which often leads to a lack of competition and an inability for consumers to choose between different products or services. Examples of a monopolistic market is the tech industry, where companies like Google have been accused of total dominance over search engines. Monopolies can have both positive and negative consequences, but ultimately limits options for consumers and can hold back innovation.
Oligopoly
An oligopoly is a market structure where only a few powerful firms operate and dominate market shares. Within an oligopoly, these firms have significant control over the prices and production of goods and services, leading to high barriers to entry for new competitors. This often results in limited choices and high prices for consumers. Some common examples of oligopolies include the airline industry and telecommunications. In these sectors, a small number of firms largely control the market, impacting everything from pricing to innovation. Despite the challenges posed by oligopolies, some benefits include economies of scale and increased competition among the few competing firms.
Monopolistic competition
Monopolistic competition is a market structure in which many small to medium-sized companies compete for customers with similar but not identical products. Unlike perfect competition, where all products are identical, products in monopolistic competition have unique characteristics that set them apart from others in the market, despite being similar. This type of market also allows for a degree of pricing power, allowing companies to increase prices without completely losing all of their customers. While this may sound like a great opportunity for businesses to thrive, it can also lead to a certain level of inefficiency and waste. Nonetheless, monopolistic competition remains one of the most common market structures found in modern economies.
The key differences between the two
Distinguishing between perfectly and imperfectly competitive markets is simple, and characteristics are distinctly different in both markets. In reality, there are limited, if any examples of a perfectly competitive market, but there are many examples of an imperfectly competitive market, such as the telecoms, drinks and cosmetics industry. For a market to be categorised as imperfectly competitive, it will not meet all the following:
- There are many firms in the industry
- Barriers to entry and exit are low
- All firms produce identical goods or services
- Firms are price takers and follow the market equilibrium price where market demand will be equal to market supply
- Has perfect information – where each participant has up-to-date knowledge and and all the information required to make rational decisions
Conclusion
In conclusion, perfect competition and imperfect competition are two distinct market structures with different characteristics. Perfectly competitive markets are hypothetical in nature, while imperfectly competitive markets exist in the real world. Monopoly, oligopoly and monopolistic competition are examples of imperfectly competitive markets that feature high barriers to entry or limited choices for consumers due to few firms dominating a particular industry.
Understanding these differences can help businesses make informed decisions when it comes to pricing strategies and marketing campaigns as well as helping them gain an edge over their competitors.
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