Imperfect Competition

Loading the player...

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.

RELATED TERMS
  1. Imperfect Market

    A market where information is not quickly disclosed to all participants ...
  2. Perfect Competition

    A market structure in which the following five criteria are met: ...
  3. Competitive Pricing

    Setting the price of a product or service based on what the competition ...
  4. Monopolistic Competition

    Characterizes an industry in which many firms market products ...
  5. Mathematical Economics

    Mathematical economics is a discipline of economics that utilizes ...
  6. Cournot Competition

    An economic model that describes an industry structure in which ...
Related Articles
  1. Markets

    Understanding Imperfect Competition

    Imperfect competition appears in several different forms. Markets are evaluated by how they compare to, and try to approach, perfect competition.
  2. Markets

    Perfect Competition

    Perfect competition is an economic idea that does not exist in the real world but can be used as a standard to measure the efficiency and effectiveness of real world markets.
  3. Markets

    Macroeconomics: Economic Systems

    By Stephen Simpson Within the study of macroeconomics, there are certain basic goals for economic systems. Generally speaking, desirable goals include economic growth, full employment, economic ...
  4. Trading

    Understanding The Price Vs. Time Equation

    Price and time generate vastly different reward: risk profiles.
  5. Investing

    Industry Handbook: Porter's 5 Forces Analysis

    If you are not familiar with the five competitive forces model, here is a brief background on who developed it, and why it is useful. The model originated from Michael E. Porter's 1980 book "Competitive ...
  6. Markets

    Understanding Monopolistic Competition

    Monopolistic competition exists in industries that have many firms offering similar products or services: for example, restaurants, supermarkets and clothing stores.
  7. Trading

    Competitive Advantage Counts

    What's the best indicator of a company's future success? Its ability to succeed when others fail.
  8. Markets

    Understanding Competitive Pricing

    Competitive pricing is the practice of setting prices for products or services based on what the competition charges.
  9. Markets

    Avoid The Perfection Trap In Trading (CELG)

    Avoid the perfection trap and make peace with the market’s high levels of systematic noise.
  10. Markets

    The History Of Economic Thought

    Economics is a vital part of every day life. Discover the major players who shaped its development.
RELATED FAQS
  1. Do all economists believe in perfect competition?

    Find out why neoclassical economists use unrealistic perfect competition models, and learn why other economists criticize ... Read Answer >>
  2. Are perfect competition models in economics useful?

    Take a look at some of the arguments made by the proponents and critics of the theory of perfect competition in contemporary ... Read Answer >>
  3. What parameters are required for a market to exhibit perfect competition?

    Learn what parameters are required for a market to exhibit perfect competition and how perfect competition is more of a theory ... Read Answer >>
  4. What is the difference between perfect and imperfect competition?

    Learn the differences between perfect competition and imperfect competition and what types of markets are considered imperfectly ... Read Answer >>
  5. What factors influence competition in microeconomics?

    Find out what influences competition in microeconomics and how perfect competition, monopoly and oligopoly vary in their ... Read Answer >>
  6. What is the difference between a monopolistic market and perfect competition?

    Learn about monopolistic and perfectly competitive markets, what they are, and the main differences between perfect competition ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center