IMPERFECT COMPETITION

IMPERFECT COMPETITION

              The main reason for competition to prevail in the market is to achieve an optimum price in favor of both buyer and seller. However, under imperfect competition price of a product does not become optimum as to how imperfect competition comes into existence.

1)      PRODUCT DIFFERENTIATION: Basically the products are of the same kind but more often than not in order to promote sale of the product, the producer modifies the product by presentation with different labels, colours and other attractions e.g. different kinds of soap, tooth-pastes, blades etc.

2)      SMALL NUMBER OF BUYERS AND SELLERS: This means that there are only a small number of sellers. Due to this fact each seller plays a dominant role in ensuring the prince policy and can also influence his rivals. Each seller cannot afford to neglect the other for fear of possible adverse price changes by the other seller being small in number, hence in a way, force the buyers to meet their demand.

3)      IMPERFECT KNOWLEDGE OF THE MARKET: This would cause chaos. Buyers will be paying unnecessarily for a product which can be obtained at a lower price in another place, or the buyers may not even be getting the initial amount of that product in an perfect market. Sellers will again benefit from this by increasing prices of product at their will applying the amount of the product they wish and not as in a perfect market.

4)      BARRIERS TO EXIT AND ENTRY OF FIRMS IN THE INDUSTRY: There are two main barriers i.e. natural and artificial. Natural barriers are those which cannot be overcome where a country has complete control over the production of a certain product and no generally implemented by producers in order to enhance their sales e.g. labeling, advertising etc. of the same products.

5)      IMPERFECT MOBILITY OF FACTORS PRODUCTION: This would result in the producer losing out. His or her optimum cost of production will not be achieved. Cost of production will increase, leading to wastage of capital. Here, supply may exceed demand and thus price will fall sharply.

6)      FORCES OF DEMAND AND SUPPLY DO NOT OPERATE FREELY: As mentioned earlier, restriction of the demand of a product will naturally lead to a monopolistic situation and if supply were restricted, price of the products would fluctuate ( however, this is only in the short run).