Perfect Competition vs. Imperfect Competition: Know the Difference
By Shumaila Saeed || Published on January 15, 2024
Perfect competition is a market structure with many firms, identical products, and no barriers to entry, while imperfect competition features fewer firms, differentiated products, and some barriers to entry.
Key Differences
Perfect competition is characterized by many firms offering identical products, ensuring no single firm can influence market prices. Imperfect competition, on the other hand, includes market structures like monopolies and oligopolies, where firms can influence prices and products are often differentiated.
Shumaila Saeed
Jan 15, 2024
In perfect competition, firms are price takers due to the homogeneous nature of products, and there are no barriers to entry or exit in the market. Conversely, imperfect competition often involves significant barriers to entry, allowing existing firms to have greater control over pricing.
Shumaila Saeed
Jan 15, 2024
The concept of perfect competition assumes perfect information, meaning consumers and producers have full knowledge of prices, products, and market conditions. In imperfect competition, information asymmetry is common, allowing firms to gain competitive advantages.
Shumaila Saeed
Jan 15, 2024
In a perfectly competitive market, economic profits are nominal in the long run as firms enter and exit the market freely. In markets characterized by imperfect competition, firms can earn substantial profits due to reduced competition and market control.
Shumaila Saeed
Jan 15, 2024
Perfect competition leads to an efficient allocation of resources, maximizing consumer and societal welfare. Imperfect competition, however, can result in less efficient resource allocation, potentially leading to market failures and reduced welfare.
Shumaila Saeed
Jan 15, 2024
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Comparison Chart
Product Differentiation
No differentiation, identical products.
Products are often differentiated.
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Jan 15, 2024
Market Entry and Exit
No barriers to entry or exit.
Significant barriers to entry and exit.
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Jan 15, 2024
Influence on Prices
Firms are price takers.
Firms have some degree of price control.
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Jan 15, 2024
Information Availability
Perfect information for consumers and producers.
Information asymmetry and partial knowledge.
Shumaila Saeed
Jan 15, 2024
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Perfect Competition and Imperfect Competition Definitions
Perfect Competition
Perfect competition involves no single firm influencing the market price.
In perfect competition, individual flower sellers can't set higher prices due to market uniformity.
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Jan 06, 2024
Imperfect Competition
A market structure where firms have control over the prices they set.
In imperfect competition, a unique fashion brand can dictate its product prices.
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Jan 06, 2024
Perfect Competition
It assumes free and unrestricted entry and exit from the market.
New coffee shops can open and close without barriers in a perfectly competitive market.
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Jan 06, 2024
Imperfect Competition
It can lead to information asymmetry between firms and consumers.
In imperfect competition, a car dealership might have more information than buyers.
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Jan 06, 2024
Perfect Competition
A market structure with many firms selling identical products.
The agricultural market is often cited as an example of perfect competition.
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Jan 06, 2024
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Imperfect Competition
Products in imperfect competition are often differentiated.
Smartphone manufacturers differentiate their products in an imperfectly competitive market.
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Jan 06, 2024
Perfect Competition
It results in the efficient allocation of resources.
In a perfectly competitive tech market, resources are allocated efficiently across all firms.
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Jan 06, 2024
Imperfect Competition
Imperfect competition includes barriers to entry for new firms.
High startup costs in the automotive industry represent barriers in imperfect competition.
Shumaila Saeed
Jan 06, 2024
Perfect Competition
Perfect competition requires that all firms and consumers have complete information.
In perfect competition, consumers know the price of bread at all bakeries.
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Jan 06, 2024
Imperfect Competition
It features fewer firms, which may dominate the market.
A city with only two major supermarkets is an example of imperfect competition.
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Jan 06, 2024
Repeatedly Asked Queries
What is imperfect competition?
Imperfect competition is a market where few firms have some control over prices and products are often differentiated.
Shumaila Saeed
Jan 15, 2024
Is perfect competition common in the real world?
Perfect competition is a theoretical model and rarely exists exactly in the real world.
Shumaila Saeed
Jan 15, 2024
How does monopolistic competition differ from perfect competition?
In monopolistic competition, products are differentiated, and firms have some pricing discretion.
Shumaila Saeed
Jan 15, 2024
What is a monopoly?
A monopoly occurs when a single firm controls the entire market, giving it significant price-setting power.
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Jan 15, 2024
What defines a perfectly competitive market?
A perfectly competitive market is defined by many firms selling identical products with no influence on prices.
Shumaila Saeed
Jan 15, 2024
What are the common types of imperfect competition?
Types include monopolistic competition, oligopoly, and monopoly.
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Jan 15, 2024
What are the potential outcomes of imperfect competition for consumers and producers?
Outcomes can vary; consumers may face higher prices, while producers may enjoy higher profits.
Shumaila Saeed
Jan 15, 2024
What are some barriers to entry in imperfect competition?
Barriers can include high startup costs, economies of scale, and government regulations that limit new entrants.
Shumaila Saeed
Jan 15, 2024
What is the significance of perfect competition for consumers?
Perfect competition often leads to lower prices and higher consumer welfare due to increased competition.
Shumaila Saeed
Jan 15, 2024
Do firms in imperfect competition always earn economic profit?
No, firms in imperfect competition may earn normal profit or even incur losses in the long run.
Shumaila Saeed
Jan 15, 2024
Can a monopoly exist in perfect competition?
No, monopolies are the opposite of perfect competition and represent a form of imperfect competition.
Shumaila Saeed
Jan 15, 2024
What is an oligopoly?
Oligopoly is a market structure where a small number of large firms dominate the industry, leading to interdependence in decision-making.
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Jan 15, 2024
Is resource allocation more efficient in perfect competition or imperfect competition?
Perfect competition often leads to more efficient resource allocation due to competition driving down prices and promoting innovation.
Shumaila Saeed
Jan 15, 2024
Can imperfect competition lead to innovation?
Yes, imperfect competition can incentivize firms to innovate to gain a competitive edge, which can benefit consumers.
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Jan 15, 2024
How does advertising play a role in imperfect competition?
Advertising is often used to differentiate products and create brand loyalty in imperfectly competitive markets.
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Jan 15, 2024
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About Author
Written by
Shumaila SaeedShumaila Saeed, an expert content creator with 6 years of experience, specializes in distilling complex topics into easily digestible comparisons, shining a light on the nuances that both inform and educate readers with clarity and accuracy.
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