A:

Perfect competition is a microeconomics concept that describes a market structure controlled entirely by market forces. In a perfectly competitive market, all firms sell identical products and services, firms cannot control prevailing market prices, market share per firm is small, firms and customers have perfect knowledge about the industry, and no barriers to entry or exit exist. If any of these conditions are not met, a market is not perfectly competitive.

Perfect competition is an abstract concept that occurs in economics textbooks, but not in the real world. Imperfect competition, in which a competitive market does not meet the above conditions, is very common. Examples of imperfect competition include oligopoly, monopolistic competition, monopsony and oligopsony.

In an oligopoly, there are many buyers for a product or service. but only a few sellers. The cable television industry in most areas of the United States is a prototypical oligopoly. While an oligopolistic market is competitive —the few active firms within an industry compete with one another — it falls well short of perfect competition in several key areas. The firms involved usually sell similar products, but they are not identical. Because of the small number of firms, a singular firm has the power to influence market prices; in fact, collusion, an underhanded tactic in which competing firms join forces to manipulate prices, has historically been rampant in oligopolies. By its very nature, an oligopoly provides a large market share to each firm. Perfect knowledge does not exist, and the barriers to entry are typically high, ensuring the number of players remains small.

Monopolistic competition describes a market that has a lot of buyers and sellers, but whose firms sell vastly different products. Therefore, the condition of perfect competition that products must be identical from firm to firm is not met. The restaurant, clothing and shoe industries all exhibit monopolistic competition; firms within those fields attempt to carve out their own sub-industries by offering products or services not duplicated by their competitors. In many ways, monopolistic competition is closer than oligopoly to perfect competition. Barriers to entry and exit are lower, individual firms have less control over market prices and consumers, for the most part, are knowledgeable about the differences between firms' products. 

Oligarchies and monopolies can pose dangers not only to an economic structure, but to a country itself. In June 2016, Senator Elizabeth Warren delivered an anti-monopolistic speech, stating that corporate concentration "threatens our markets, threatens our economy, and threatens our democracy." (For more, see "What Are Common Examples of Monopolistic Markets.")

Monopsony and oligopsony are counterpoints to monopoly and oligopoly. Instead of being made up of many buyers and few sellers, these unique markets have many sellers but few buyers. The defense industry in the U.S. constitutes a monopsony; many firms create products and services and attempt to sell them to a singular buyer, the U.S. military. An example of an oligopsony is the tobacco industry. Almost all of the tobacco grown in the world is purchased by less than five companies, which use it to produce cigarettes and smokeless tobacco products. In a monopsony or an oligopsony, it is the buyer, not the seller, who can manipulate market prices by playing firms against one another.

RELATED FAQS
  1. Does perfect competition exist in the real world?

    There are significant obstacles preventing perfect competition in today's economy, and many economists think it is better ... Read Answer >>
  2. What's the difference between a monopoly and a monopsony?

    A monopoly exists when a single organization is the sole supplier of a commodity, whereas a monopsony controls the market ... Read Answer >>
  3. 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 >>
  4. Why are there no profits in a perfectly competitive market?

    See why economic profits are theoretically impossible in a perfectly competitive market and why some economists use perfect ... Read Answer >>
  5. Is Pareto Efficiency the same thing as perfect competition?

    Find out how a perfectly competitive market should lead to Pareto efficiency, at least according to standard neoclassical ... Read Answer >>
  6. Product Differentiation Is Important in Today's Financial Climate

    Businesses today are utilizing product differentiation to set themselves apart from the competition. Read Answer >>
Related Articles
  1. Small Business

    What are antitrust laws?

    Learn about antitrust laws or "competition laws." These statutes protect consumers from predatory business practices by ensuring fair competition exists.
  2. Small Business

    Antitrust Defined

    Check out the history and reasons behind antitrust laws, as well as the arguments over them.
  3. Financial Advisor

    FAs Should Factor Clients Into Succession Plans

    Financial advisory firms are finally taking succession planning seriously. Here's how.
  4. Investing

    Capital Intensive Companies: What Are The Pros & Cons for Investors?

    Learn about the pros and cons of investing in capital-intensive industries. Find out how barriers to entry and mature industries impact investment outlook.
  5. Insights

    How and Why Companies Become Monopolies

    Without competition, monopolies can raise prices and lower quality, leaving consumers little choice. But monopolies can benefit consumers as well.
  6. Investing

    What is private equity?

    Although few people actually understands the industry, private equity (PE) has gained a great amount of influence in today's financial marketplace. Check out what it is and how it operates.
  7. Investing

    Analyzing Porter's Five Forces on Apple (AAPL)

    Evaluate Apple's position in the marketplace by looking at it through the perspective of the Porter Five Forces Model for industry analysis.
RELATED TERMS
  1. Monopolistic Competition

    Monopolistic competition characterizes an industry in which many ...
  2. Oligopsony

    Similar to an oligopoly (few sellers), an oligopsony is a market ...
  3. Market Power

    Market power describes a company's relative ability to manipulate ...
  4. Buyer's Monopoly

    A buyer's monopoly, or monopsony, is a market situation where ...
  5. Duopoly

    A duopoly is a situation where two companies own all or nearly ...
  6. Buyer's Market

    A buyer's market is a situation in which supply exceeds demand, ...
Trading Center