Imperfect Competition

One serious deviation from an efficient market comes from imperfect competition or monopoly elements .. Whereas under perfect competition no firm or consumer can affect prices, imperfect competition occurs when a buyer or seller can affect a good’s price. For example, if the telephone company or a labor . union is large enough to influence the price of phone service or labor, respectively, some degree of imperfect competition has set in. When imperfect competition arises, society may move inside its PPF. This would occur, for example, if a single seller (a monopolist) raised the price to earn extra profits.The output of that good would be reduced below the most efficient level, and the efficiency of the economy would thereby suffer. In such a situation, the invisible- hand’ property of markets may be violated.

What is the effect of imperfect competition? Imperfect competition leads to prices that rise above cost and to consumer purchases that are reduced below efficient levels.The pattern of too high price and too low output is the hallmark of the inefficiencies associated with imperfect competition.

In reality, almost all industries possess some measure of imperfect competition. Airlines, for example, may have no competition on some of their routes but face several rivals on others. The extreme case of imperfect competition is.the viewpoint-a single supplier who alone determines the price of a particular good or service. For example, Microsoft has
been a monopolist in the production of Widows operating systems.

Over the last century, most governments have taken steps to curb the most extreme forms of imperfect competition. Governments sometimes regulate the price and profits of monopolies such as local water, telephone, and electric utilities. In addition, government antitrust laws prohibit actions such as price fixing and agreeing to divide up markets. The most important check to imperfect competition, however, is the opening of markets to competitors, whether they be domestic or foreign. Few monopolies’ can long withstand the attack of competitors unless governments protect them through tariffs or
regulations.

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