Imperfect Competition Assumption

Courses : Intermediate Macroeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Imperfect Competition Assumption The assumption of imperfect competition is an assumption that is applied in several microeconomic models to describe markets that are not completely competitive. In an imperfect competition market, there are several companies that have market power to influence prices and production quantities. There are several forms of imperfect competition, such as monopoly, oligopoly and monopolistic competition. In a monopoly market, there is only one company that dominates the market and has full control over the price and quantity of production. Whereas in oligopoly, there are only a few large companies that control the market and compete with each other. Monopolistic competition occurs when there are many small firms that produce almost the same product but have few differences. Under the assumption of imperfect competition, there are several impacts on firm and market behavior. Companies that dominate the market will tend to maintain high prices to obtain maximum profits, while companies operating in a monopolistic competition market will try to differentiate their products from their competitors to maintain market share. The assumption of imperfect competition also allows for market failure, where the market does not achieve optimal social efficiency. This occurs when the price of a marketed product is higher than the cost of production, thereby reducing consumer welfare and encouraging companies to produce less than they should. However, not all forms of imperfect competition result in market failure. Some forms of imperfect competition, such as oligopoly, can result in efficiency in production and improvement in product quality through innovation. The assumption of imperfect competition is a condition where the market does not operate under perfect competition conditions. In an imperfect market, some firms have significant market power and are able to influence market prices. Some of the assumptions underlying imperfect markets include: 1. Limited information: Information about products, prices and quality is not fully available to all market participants. As a result of these limitations, some producers are able to leverage the information they have to charge higher prices and generate greater profits. 2. High entry costs: Some industries have high entry costs which make it difficult for new companies to enter the market. For example, the pharmaceutical industry has high research and development costs, which makes it difficult for new companies to compete with longstanding companies in the industry. 3. Product differentiation: Different products can have different characteristics, such as brand, quality, and style 4. Presence of market power: In an imperfect competitive market, firms have the power to influence market prices through their marketing strategies and product pricing. This is in contrast to a perfectly competitive market, where no single firm has market power. 5. Barriers to entry: In imperfectly competitive markets, firms may face barriers to entry, such as high costs of entering the market or the presence of regulations that impede competition. This makes the market less efficient and hinders the ability of new firms to enter and compete with established firms. 6. Differentiated Products: In imperfectly competitive markets, a company's products may have distinct and unique features, which make consumers more likely to choose that product over products from other companies. This can cause the company to have greater market power and can set a higher price. 7. Presence of oligopoly or monopoly: In an imperfect competitive market, a few firms can have enormous market power and control product prices in the market. In case of oligopoly, a few large firms have significant market power, whereas in case of monopoly, only one firm controls the market. All of these assumptions cause markets to be less efficient and cause consumers to pay higher prices than in perfectly competitive markets. Therefore, governments often regulate and supervise imperfect competition markets to protect consumers and encourage fair competition in the market. The market imperfection assumption also recognizes the existence of market forces, such as monopoly, oligopoly, and monopsony, which can affect the behavior of producers and consumers as well as market prices. In the case of monopoly, one firm controls the market and can charge a high price because no competitor can offer a lower price. In an oligopoly, a few firms control the market and can influence prices through collusive actions or aggressive competition. Whereas in monopsony, one dominant buyer in the market can influence the price paid to producers. In situations of market imperfections, market prices are no longer considered as a variable that is completely flexible and can be changed by market mechanisms. Instead, the behavior of producers and consumers can be influenced by market forces and government regulations. This gave rise to studies on oligopoly strategy, monopoly regulation, and marketing strategy. Overall, assumptions about market imperfections open the door for richer and more complex market analyzes, and form the basis for analyzing various forms of business strategy and government regulation in influencing market behavior.