The following points highlight the three different forms of imperfect competition.
The different forms are: 1. Oligopoly 2. Duopoly 3. Monopolistic Competition.
Imperfect Competition Form # 1. Oligopoly:
Oligopoly is a market situation in which there are a few firms selling homogeneous or differentiated products.
It is difficult to pinpoint the number of firms in the Oligopolist market. There may be three, four or five firms.
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It is also known as competition among the few. An oligopoly industry produces either a homogeneous product or heterogeneous products. The former is called pure or perfect oligopoly and the latter is called imperfect or differentiated oligopoly.
Characteristics of Oligopoly:
Following are the characteristics of Oligopoly:
1. Few Sellers:
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In oligopoly there are few sellers or producers. Each seller produces a major share of the product.
2. Mutual Inter-dependence:
There is recognised inter-dependence among the sellers in the oligopolistic market. Each oligopolist firm knows that changes in its price advertising, products etc. may lead to counter-moves by rivals. When the sellers are less in number, each produces a considerable fraction of the total output of the industry and can have a noticeable effect on market conditions.
3. Entry and Exit of Firms Difficult:
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Because there is keen competition in an oligopolistic industry, there are no barriers to entry into or exit from it. However, in the long rim there are some types of barriers to entry which tend to restrain new firms from entering the industry.
4. Heavy Expenditure on Advertisement:
Oligopolist firms spend much on advertisement and customer services. As Professor Baumol has written—”Under oligopoly adverting can become a life and death matter.”
For example:
If all oligopolists continue to spend a lot on advertising their products and one seller does not match up with them, he will find his customers gradually going in for his rival’s product. Further, it can be said that “the different firms of an oligopolistic industry are all in the same boat. If one rocks the boat, others will be affected and in all probability will know the identity of the responsible firms and can retaliate.”
Imperfect Competition Form # 2. Duopoly:
Duopoly means such type of business in which there are two sellers, selling either a homogeneous product or a differentiated product. These two sellers enjoy among themselves a monopoly in the sale of the product produced by them. Both the sellers are completely independent and no agreement exists between them.
Even though they are independent, a change in the price and output of one will affect the other, and may set a chain of reactions. A seller may however assume that his rival is unaffected by what he does, in that case he takes only his own direct influence on the price.
Imperfect Competition Form # 3. Monopolistic Competition:
The word Monopoly has been derived from Greek word Mono + Poly. Mono means single and Poly means producer. Therefore, Monopoly means single producer.
It has been defined as:
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“Monopoly is that market form in which a single producer controls the whole supply of a single commodity which has no close substitutes.”
As Prof. Benham has defined:
“A monopolist is literally a sole seller …. and monopoly power is based entirely on control over supply.” Monopolistic competition refers to a market situation in which there are many producers producing goods which are close substitutes of one another or where output is differentiated.
Here no firm can have any perceptible influence on the price-output policies of the other sellers nor can it be influenced much by their actions. Thus, monopolistic competition refers to competition among a large number of sellers producing close but not perfect substitutes for each other.