When does Competition become Imperfect in a Market?

In this article we will discuss about when does competition become imperfect in a market.

Perfect competition, according to Mrs. Joan Robinson, is never likely to prevail in the market of any actual commodity. In actual practice most of the markets are imperfectly competitive.

Competition becomes imperfect when any of the following conditions arises in the market:

1. A Small Number of Firms or Sellers:

Competition becomes imperfect when there are a small number of firms or sellers in an industry. As the number of firms is small, the size of each firm becomes comparatively large. Accordingly, a small number of firms (e.g., a few building contractors or a few caterers in a town) compete closely with one another.

2. Differentiated Products:

The market becomes imperfect when the firms manufacture or the sellers supply differentiated products. Although all of them manufacture or sell the same commodity, say, soap or hair oil or face powder or toothpaste, they do so by using different brand names and trade-marks for their products.

Each firm differentiates its product in some way, for example, by using its own a trademark or a brand-name. The object is to create the impression that its product is different from those of its rivals. So, a market becomes imperfect when the product or service of the firms are not homogeneous.

3. A Partial Control Over the Market Supply and Price:

As a small number of firms supply differentiated products or services, each firm has its own circle of customers and each of them supplies a quite significant proportion of the total market supply. Accordingly, each of them can influence the market supply and price of the product to some extent by its independent action. But none of them has a full control over the market supply and market price because of the presence of competitors and the availability of close substitute (or almost identical) items.

4. Absence of Perfect Knowledge of Buyers and Sellers:

A market becomes imperfect in the absence of perfect knowledge of buyers or sellers regarding the price and other terms of transactions. Buyers and sellers may be ill-informed about the terms on which the transactions are going on elsewhere.

5. Absence of Close Contact between Buyers and Sellers:

The market becomes imperfect when buyers and sellers are not in close touch with one another. For this reason, the retail markets become very much imperfect; and in such markets it is not possible for all the buyers to be in close touch with all the sellers, since consumers are unwilling to waste time comparing the prices charged by all the sellers of a commodity even in the same town.

6. Selling Costs or Advertisement Expenses:

Under imperfect competition almost all the firms are to spend a lot of money on advertisement for increasing sales of its products. So, the costs of a firm in an imperfectly competitive market are made up of both production cost and selling cost. But in perfect competition there is no selling cost.

7. Special Services to the Buyers and Buyers’ Preferences:

Very often the market of a commodity becomes imperfect, particularly in the retail trade, when the sellers offer some special services to the buyers so as to create buyers’ preferences for their products through what is known as ‘service competition’.

These special services include regular and prompt delivery of goods, good and pleasing behaviour of salespeople, instalment purchase facilities, gift and bonus coupons, etc. In fact, service competition instead of price competition is the distinguishing feature of an imperfect market. Buyers’ preferences for one seller to another are also created by such factors as pleasing advertisement or higher transport costs.

8. Transport Costs:

It is the transport cost or, more generally, the existence of space and therefore of different localities of a town, which may give a few firms in a town (particularly in retail trades) a distinct advantage. Such an advantage is a source of monopoly power. Such monopoly is known as local monopoly. Largely due to transport problems and costs, people generally prefer local shops, local hotels, local cinemas, etc. So, transport costs and locational advantages make competition imperfect.