Read this article to learn about Pure Competition, Perfect Competition and Imperfect Competition!
The different market forms depend on the degree of competition prevailing in the market.
Broadly speaking, we have the following market forms.
1. Pure Competition:
Pure Competition is said to exist when the following two conditions are fulfilled:
(i) Large Number of Buyers and Sellers:
The first condition is that there should be operating in the market a large number of buyers and sellers. If that is so, no single producer or purchaser will be able to influence the market price by varying respectively his supply or demand. The output of any single firm is only a small portion of the total output and the demand of any single purchaser is only a small portion of the total demand. Hence, the market price has to be taken as given and unalterable by every purchaser and seller. This happens when the number of buyers and sellers is very large.
(ii) Homogeneous Product:
The second condition is that the articles produced by all firms should be standardised or identical. In case of farm produce, e.g., Kalyan wheat, it is immaterial for the purchaser as to who has produced it. He can buy it as well from the one as from the other. This condition ensures that the same price rules in the market for the same commodity. In case the output is not standardised (i.e., it is differentiated), each individual firm will be in a position to influence the market price.
Whether the products are identical or not has to be looked at from the purchaser’s angle. Even if the products are identical, the purchaser may have a prejudice against the output of a particular firm and may consider it different. That is, if the consumers regard the commodities as different, they should be considered different for purposes of classification in spite of the fact that they are actually identical.
The consumers generally believe that the products are different. They generally believe that the commodities that they purchase from a particular shop are superior, even though they may actually be of the same quality. When the quality is the same, the commodities are perfect substitutes of one another and their cross-elasticity is infinity.
In these circumstances, if a firm raises its prices, it will lose all customers. It can sell as much as it likes at the prevailing price. Why should it then think of lowering its price? Hence it cannot raise its price and it need not lower it. That is why the prevailing market price is accepted and acted upon by all dealers. Thus, if the above two conditions, viz., homogeneous products and a large number of buyers and sellers are found in a market, it is said to be under pure competition.
Under pure competition, the average revenue curve (also called demand curve) of a firm will be a horizontal straight line, which means that any firm can sell any quantity at the prevailing price. Since the number of firms is very large, no individual firm has the power to vary the market price. Also, since the products are identical from the consumers’ point of view, the price paid by them cannot be different. This is represented by the following diagram (Fig. 25.1).
OX and OY are the two axes. Along OX is represented the output and along OY the price/Revenue. At OP price, the sellers can sell as much as they like. They cannot charge more and they will not charge less. If they raise the price, they will lose their customers, and if they charge less, they will be unnecessarily losing.
Examples of pure competition are to be found in the case of farm products, e.g., wheat, cotton, rice. There are a large number of producers, each producing an insignificant proportion of the total market supply. Their product is similar and none of them is in a position to influence the market price by his own individual action. In other fields, we seldom come across pure competition.
2. Perfect Competition:
Perfect competition, on the other hand, is a wider term. It includes the two conditions of pure competition mentioned above as well as some more conditions mentioned below.
The existence of the following conditions in a market will make it a perfect competition market:
(i) Large number of buyers and sellers.
(ii) Homogeneous product.
(iii) Free Entry or Exit:
Under perfect competition, all firms in the industry will be earning normal profit. This will happen only if there are no restrictions on the firms’ entry into, or exit from, that industry. If the profit is more, new firms will enter and the extra profit will be competed away; and if, on the other hand, profit is less, some firms will quit raising the profits for the remaining firms.
But if there are restrictions on the entry of new firms, the existing firms may enjoy super-normal profit and the competition will be imperfect. Only when there are no restrictions on entry or exit, the competition is said to be perfect.
(iv) Perfect Knowledge:
Another assumption of perfect competition is that the purchasers and sellers should be fully aware of the prices that are being offered and accepted. In case there is ignorance among the dealers, the same price cannot rule in the market for the same commodity. When the producers and the customers have full knowledge of the prevailing price, nobody will offer more and none will accept less, and the same price will rule throughout the market. The producers can sell at that price as much as they like, and the buyers also can buy as much as they like.
(v) Absence of Transport Costs:
If the same price is to rule, it is necessary that no cost of transport has to be incurred. If the cost of transport is there, prices must differ in different sectors of the market.
(vi) Perfect Mobility of the Factors of Production:
This mobility is essential in order to enable the firms to adjust their supply to demand. If the demand exceeds supply, additional factors will move into the industry, and, in the opposite case, move out. Mobility of the factors of production is essential to enable the firms and the industry to achieve an equilibrium position.
3. Imperfect Competition:
In real life, perfect competition or even pure competition are seldom met with. On the other hand, it is imperfect competition which is the rule, and perfect competition is the exception. However, there are different degrees of imperfect competition, ranging from what is called-‘monopolistic competition’ to ‘simple monopoly’. In between these two forms of imperfect competition are ‘oligopoly’ and ‘duopoly”.
A. Monopolistic Competition:
The main features of monopolistic competition are:
(i) In monopolistic competition, the number of dealers is quite large but not as large as under perfect competition.
(ii) The products are not homogeneous; they are, on -the other hand, differentiated by means of different labels attached to them, such as different brands of toilet requisites.
(iii) Either in ignorance or on account of transport costs or lack of mobility of the factors of production, the same price does not rule in the market throughout. Rather different prices are charged by different producers for products which are really similar but are made to appear different through advertisements, high pressure salesmanship and labelling and branding. The result is that each producer comes to have a hold on a clientele from whom he can charge higher prices.
(iv) Under monopolistic competition, the demand curve or sales curve, or what is also called average revenue curve, is not a horizontal straight line. II is, on the other hand, a downward sloping curve, i.e., the seller can sell more by reducing price. Under perfect competition, he need not reduce the price, for he can sell any amount at the prevailing price.
Under monopolistic competition, the seller can also charge higher prices because his customers are attached to him. He can thus have a price policy of his own, whereas a seller under perfect competition has no price policy; he has merely to accept the market price as given.
(v) Under imperfect competition, the demand for the product is not perfectly elastic; it is responsive to changes in price.
This form of market is a blend of monopoly and competition and has been called monopolistic competition by Chamberlin, an American economist. In the real world, we have neither monopoly (i.e., absence of competition) nor perfect competition but imperfect competition, i.e. partly monopoly and partly competition. In this market form, the products are not perfect substitutes for one another but they are close substitutes.
In duopoly, there are two sellers, selling either a homogeneous product or a differentiated product. These two sellers between them enjoy a monopoly in the sale of the product produced by them.
The word ‘oligopoly’ is from the Greek words Olig, meaning ‘a few’ and ‘poly’ veaning sellers. Thus, a market form, in which there are only a few sellers, is called oligopoly. They may be producing and selling either a homogeneous or a differentiated product, the former is called perfect oligopoly and the latter imperfect or differentiated oligopoly.
In India, till recently, distributor of petrol was in the hands of Burmah Shell, Esso, Caltex and Indian Oil Company. The other example of oligopoly is the manufacture of motor cars by Hindustan Motors (Ambassador Car), Premier Automobiles (Fiat Cars) and Standard Motor Company (Standard Cars).
In monopoly, a single producer or seller controls the market. There are no close substitutes for his product. He controls the supply and he can fix the price. He is the firm and he also constitutes the industry. Thus, under monopoly the distinction between the firm and industry disappears. The average revenue curve or the demand curve always slopes downwards to the right as in monopolistic competition, but it is less elastic in monopoly than in monopolistic competition.
In monopoly, there is one seller and in monopolistic competition many sellers. In monopoly, there is no need to differentiate products because no close substitutes are available. It is one homogeneous product and completely under the control of the monopolist.
Classification of Market Forms:
The following chart shows at a glance different types of market forms on the basis of the nature of competition:
B . Imperfect Competition:
(a) Monopolistic Competition – Many – Differentiated
(b) Perfect Oligopoly – A few – Homogeneous
(c) Imperfect Oligopoly – A few – Differentiated
C. Pure or Absolute Monopoly:
Pure or Absolute Monopoly – One – Homogeneous