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November 15, 2019 

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KEYNESIAN CROSS: The standard diagram used in Keynesian economics to identify the equilibrium level of aggregate output (that is, gross domestic product), with aggregate expenditures measured on the vertical axis, and aggregate output measured on the horizontal axis. This diagram contains two key lines, the aggregate expenditure line and the 45-degree line. Intersection between these lines indicates equilibrium aggregate output. This intersection, or cross, is what gives rise to the name.

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IMPERFECT COMPETITION:

Markets or industries with two or more sellers and buyers that fail to match the criteria of perfect competition. The most noted examples of imperfect competition are the two market structures with selling-side control--monopolistic competition and oligopoly. Lesser known market structures with buying-side control--monopsonistic competition and oligopsony--are also considered as imperfect competition. Facing no competition, monopoly and monopsony are not included. Most real world markets can be considered imperfect competition.
Imperfect competition is the general term for competitive markets that do not match the criteria of perfect competition. They are competitive, but they are imperfect. Market structures with no competition--monopoly and monopsony--are excluded.

Competition

Competition comes in two basic varieties, both of which are found in imperfect competition--competition among the few and competition among the many.
  • Competition Among The Few: This form of competition occurs with only a handful of participants. Each participant usually knows the other competitors quite well. Many markets operate with competition among the few. In such markets, one seller can gain a competitive advantage by offering a product that is just a little better than other sellers--not the best product, only a little better product. Such competition seldom leads to an efficient use of resources.

  • Competition Among The Many: This form of competition occurs with hundreds, thousands, or even millions of participants. Each participant is lost among the masses. In this case, the only way for a seller to gain a competitive advantage is to produce the best possible product. Competition among the many brings out the best, that is, the most efficient use of resources.

Perfect Competition

The theoretical extreme of competition among the many is perfect competition. The key characteristics of perfect competition are: (1) a large number of small firms, (2) identical products sold by all firms, (3) freedom of entry into and exit out of the industry, and (4) perfect knowledge of prices and technology. These four characteristics are virtually impossible to match in the real world. Some markets come close to one or two, but none match all four completely.

As such, in its purest, perfect form, perfect competition does NOT exist in the real world. All real world markets are by definition, imperfect. And those facing any degree of competition fall into the category of imperfect competition.

Buying and Selling Imperfection

The four market structures that are technically included in the category of imperfect competition are monopolistic competition, oligopoly, monopsonistic competition, and oligopsony. The first two are the most noted participants. The second two are often overlooked, but justifiably included.
  • Monopolistic Competition: This market structure is characterized by a large number of relatively small competitors, each with a modest degree of market control on the supply side. A key feature of monopolistic competition is product differentiation. The output of each producer is a close but not identical substitute to that of every other firm, which helps satisfy diverse consumer wants and needs.

  • Oligopoly: This market structure is characterized by a small number of relatively large competitors, each with substantial market control. Oligopoly sellers exhibit interdependent decision making which can lead to intense competition among the few and the motivation to cooperate through mergers and collusion.

  • Monopsonistic Competition: This market structure is characterized by a large number of relatively small competitors, each with a modest degree of market control on the demand side. Monopsonistic competition represents the demand-side counterpart to monopolistic competition on the supply side. A key feature of monopsonistic competition is also product differentiation as each buyer seeks to purchase a slightly different product.

  • Oligopsony: This market structure is characterized by a small number of relatively large competitors, each with substantial market control on the buying side. Oligopsony represents the demand-side counterpart to oligopoly on the supply side. Oligopsony buyers exhibit interdependent decision making which can lead to intense competition and the motivation to cooperate.

Imperfection and Inefficiency

Imperfectly competitive market structures are notable because they do not efficiently allocate resources. They are inefficient because they have market control. Monopolistically (and monopsonistically) competitive firms have a modest degree of market control and oligopolistic (and oligopsonistic) firms have significant market control.

However, whether market control is modest or significant, imperfectly competitive sellers face negatively-sloped demand curves and imperfectly competitive buyers face positively-sloped supply curves. In either case, in both cases, price is not equal to marginal cost. The satisfaction obtained from production is not equal to the satisfaction lost from foregone production.

Because an inefficient allocation of resources is undesirable, government is occasionally called upon for corrective policies. Although monopolistic (and monopsonistic) competition is, strictly speaking, inefficient, inefficiency problems tend to be relatively minor. In most cases, government corrective actions are likely to make matters worse when attempting to correct inefficiency. In contrast, the inefficiencies of oligopoly (and oligopsony) tend to be relatively more severe and usually prompt close scrutiny by government.

A Perfection Benchmark to the Rescue

This is where the benchmark of perfect competition is most important. By comparing specific, real world, imperfectly competitive markets with perfect competition, the degree of inefficiency can be indicated. If a monopolistically competitive market has a price of $10,001 and a quantity of 9,999,999, while the comparable price and quantity for perfect competition are $10,000 and 10,000,000, then inefficiency exists, but the problem is relatively small. Undertaking imperfect corrective government actions is likely to make matters worse.

In contrast, if an oligopolistic market has a price and quantity of $20,000 and 5,000,000, compared to a price and quantity for perfect competition of $10,000 and 10,000,000, then inefficiency also exists, and this inefficiency IS DEFINITELY more severe. Even imperfect corrective government policies have a good chance of improving upon this inefficiency.

In real world, inefficiency problems and the need for corrective government policies are extremely diverse. And with this diversity comes differences of opinion and controversy. In fact, a number of the more interesting economic discussions involve questions about what, if any, actions government should take to correct the inefficiencies of imperfect competition.

<= IMPACT LAGIMPLEMENTATION LAG =>


Recommended Citation:

IMPERFECT COMPETITION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2019. [Accessed: November 15, 2019].


Check Out These Related Terms...

     | oligopoly | monopolistic competition | oligopsony | monopsonistic competition | market structure continuum | market structures |


Or For A Little Background...

     | perfect competition | market control | price maker | price taker | firm | efficiency | demand | supply | competition among the few | competition among the many |


And For Further Study...

     | monopolistic competition, efficiency | monopolistic competition, characteristics | monopolistic competition, short-run production analysis | collusion, efficiency | oligopoly, characteristics | collusion, production analysis | oligopoly and monopolistic competition | perfect competition, characteristics | monopoly | monopsony | bilateral monopoly | duopoly |


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