Imperfect competition is a competitive market situation where there are many sellers, but they are selling heterogeneous (dissimilar) goods as opposed to the perfect competitive market scenario. As the name suggests, competitive markets that are imperfect in nature.
Imperfect competition is the real world competition. Today some of the industries and sellers follow it to earn surplus profits. In this market scenario, the seller enjoys the luxury of influencing the price in order to earn more profits.
If a seller is selling a non identical good in the market, then he can raise the prices and earn profits. High profits attract other sellers to enter the market and sellers, who are incurring losses, can very easily exit the market.
Features of Imperfect Competition
The main features of such imperfectly competitive market structures are:
The Firms Sell Differentiated Products under Brand Names: The firms generally sell differentiated product by giving them brand names and modifying their characteristics to distinguish them from the products of their rivals.
The Firms usually fix Prices of their Products themselves: The usually set their own prices for their products and let the market demand determine the quantity produced.
Publicity, Advertisement, etc. are Used for Sales Promotion: The firms spend money on publicity, propaganda or advertisements to boost demand for their own product and attracting customers from others firms.
The Firms Create Barriers for New Entrants: The firms may adopt methods and measures to prevent entry of new firms so as to earn and retain high profits.
The Firms usually Produce output below Optimum Capacity: Generally the firms under imperfect competition operate on leftward portion of their U – shape cost curve and thus produce less than the capacity (optimum) output as defined by the minimum point of the average cost curve. This presence of excess capacity means that the firms do not, even in the long – run, exploit economies of scale. We analyse the short – run and long – run behavior of firms operating under a type of imperfect market structure known as monopolistic competition.