Competition

• 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

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

• 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

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

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.