Imperfect Competition

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What is 'Imperfect Competition'

Imperfect competition exists whenever a market, hypothetical or real, violates the abstract tenets of neoclassical pure or perfect competition. Since all real markets exist outside of the plane of the perfect competition model, each can be classified as imperfect. The contemporary theory of imperfect versus perfect competition stems from the Cambridge tradition of post-classical economic thought.

BREAKING DOWN 'Imperfect Competition'

The treatment of perfect competition models in economics, along with modern conceptions of monopoly, were founded by the French mathematician Augustin Cournot in his 1838 "Researches Ito the Mathematical Principles of the Theory of Wealth." His ideas were adopted and popularized by the Swiss economist Leon Walras, considered by many to be the founder of modern mathematical economics.

Prior to Walras and Cournot, mathematicians had a difficult time modeling economic relationships or creating reliable equations. The new perfect competition model simplified economic competition to a purely predictive and static state. This avoided many problems that exist in real markets, such as imperfect human knowledge, barriers to entry and monopoly.

The mathematical approach gained widespread academic acceptance, particularly in England. Any deviation from the new model of perfect competition was considered a troublesome violation of the new economic understanding.

The New Language of Perfect and Imperfect Competition

One Englishman in particular, William Stanley Jevons, took the ideas of perfect competition and argued that competition was most useful not only when free of price discrimination, but also a small number of buyers or large number of sellers in a given industry.

Thanks to the influences of Jevons, the Cambridge tradition of economics adopted a whole new language for potential distortions in economic markets – some real and some only theoretical. Among these problems were oligopoly, monopolistic competition, monopsony and oligopsony.

Much of the new economic language and analysis was parodied from physics, particularly a focus on indefinite multiplicity, divisibility, infinity and infinitesimally small actors in an equation. Even today, the basic graphs and equations shown in most Economics 101 textbooks hail from these mathematical derivations.

Problems With Concepts of Imperfect Competition

The Cambridge school’s wholesale devotion to creating a static and mathematically calculable economic science had its drawbacks. Ironically, a perfectly competitive market would require the absence of competition. All sellers in a perfect market must sell exactly similar goods at identical prices to the exact same consumers, all of whom possess the same perfect knowledge. There is no room for advertising, product differentiation, innovation or brand identification in perfect competition.

No real market can or could attain the characteristics of a perfectly competitive market. The pure competition model ignores many factors, including the limited deployment of physical capital and capital investment, entrepreneurial activity and changes in the availability of scarce resources. Other economists have adopted more flexible and less mathematically rigid theories of competition, such as the evenly rotating economy, though the language created by the Cambridge tradition still predominates the discipline.