Imperfect Competition
In the previous chapters, we have identified P-competition as an ideal, in that the P-competitive structure encourages strong price competition, which in turn leads to price and output at the supply-and-demand equilibrium levels. In appropriate circumstances, the supply-and-demand equilibrium is efficient, as the Fundamental Principle of Microeconomics points out.
For an industry to have a P-competitive structure, it must have all four of these characteristics:
- Many buyers and sellers
- A homogenous product
- Sufficient knowledge
- Free entry
Some industries (such as financial service industries and many agricultural industries) seem to approximate the P-competitive structure nearly enough that there is little doubt that the P-competitive theory can be applied to them. A few industries are equally clearly exceptions to which the P-competitive theory cannot be applied: monopolies, which we studied in the last chapter. There seem to be a considerable number of industries that don't clearly fit either extreme. The discussion of these cases in the 1920's and 1930's led to a classification of industries and markets into four major types:
- "Perfect Competition"
- Monopoly
- Oligopoly
- Monopolistic competition
We now need to say what we can about the last two of these types. "Oligopoly" and "Monopolistic Competition" are often lumped together as "Imperfect Competition."
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