Perfect and imperfect competition: types, characteristics, advantages and disadvantages

Competition for any subjects of market relations, especially those producing goods and services, is objectively coercive in nature. Competition forces enterprises to apply the latest production technologies, helps to increase labor productivity, and maintain or reduce the cost of products. In other words, competition reduces production costs, saves resources, and helps maximize the rational combination of production factors used.

Healthy market competition subjects the activities of each enterprise to external and internal control. Control of competitors, that is, external, is characterized by cruelty and impartiality. The competitiveness of an economic entity is ultimately determined by the consumer by choosing a certain product or service.

Perfect competition

It is understood as a state of the market in which no one can influence the price of a product. It is understood that the value of a product is determined only by the cost of its production. With this type of competition, neither the state nor other sellers influence pricing.

In the current state of market relations, perfect competition does not occur. Examples of it can only be found in books. In a market where such competition exists, there must be a large number of sellers producing goods with similar characteristics.

Perhaps, if such a market existed, it would look like modern competition among firms. The examples would be slightly different, but the essence of the concept would remain the same.

Only in this option can the price of the product be set sensibly. In addition, sellers will strive to increase their market share by improving product characteristics, service, and marketing solutions.

Pros and cons of competition

Competition is considered a positive phenomenon for society as a whole, but it also has some negative sides:

Advantage	Flaw
Scientific and technological progress is developing, which improves the quality of life of people	Many manufacturers are starting to use “dirty” methods of competition
Manufacturers take into account consumer demands: expanding the range, improving product quality, looking for ways to reduce costs	Overuse of human and natural resources. Environmental violations
A fair market value of goods is formed, which is a counterbalance to the extortionate prices of monopolists	A large number of bankrupt producers contributes to rising unemployment
Shortages of goods and services are prevented	Uneven distribution of income between social strata of the population

Imperfect competition. Examples and types

In imperfect competition, everything is much more complicated than in the previous form. There are many different indicators that characterize this state of competition in the market - from state price regulation to various collusions of large market players. Unfair competition, examples of which will be indicated below, leads to production stagnation and does not stimulate the enterprise to develop.

It is divided into several subtypes: monopoly, monopolistic competition, oligopoly. Let's look at them in order.

Functions of competition

Competition is very important for the development of national economies. Let's consider its main functions that benefit both the state and citizens.

Development – Technology and science are constantly developing. In order to reduce costs and modernize products, large players invest huge amounts of money in this. With equal components, the one with the lowest cost wins.
Control – Price regulation occurs naturally, the buyer makes a choice based on the ratio of cost and quality. Equilibrium arises through the equation of supply and demand. The seller and the buyer find a compromise. The emergence of monopolies is excluded. Individual firms have no significant influence and cannot impose their own terms.
Distribution – Natural screening out of insolvent firms, distribution of income between players according to the size of their contribution to development. Companies that choose the wrong path or do not have sufficient funds for modernization naturally leave.
Regulation of production - Increasing the production of goods with increased demand, instead of those that are uncompetitive. The market price is a marker for manufacturers; based on it, companies redirect funds to more profitable goods.

Monopoly

This subspecies is considered the complete opposite of such a concept as perfect competition. Examples can be found in the oil and gas sector of the economy. A monopoly presupposes the presence of one seller of services in the market. This can be at the regional, national, international level. This type is called “unfair competition”. Examples may be the following: supply, transportation of natural gas, oil production and others.

Mandatory conditions for such competition:

The only seller. For example, in a fruit market there may be only one banana seller. Everyone will buy only from him and on his terms, because there are simply no other sellers or they are prohibited by law.
The only product on the market. It is understood that there are no analogues of the product being sold, and no one can replace it with anything.
There is no free access to the market for other sellers. This situation mainly happens due to restrictions set by the state. That is, there are no prerequisites or legal opportunities for other enterprises to operate in the market in a monopoly sphere.

It is immediately worth noting that there is such a thing as a natural (natural) monopoly. This is a subtype of monopolistic competition that is often formed artificially. Typically, such a monopoly is created by the state itself due to the large excess of benefits over negative aspects. Such examples of competition in Russia: JSC Gazprom, JSC Rosneft.

Many economists agree that, operating in the market, a monopolist enterprise is not interested in improving the quality of its services, since there is no need for this. One can argue with this assumption, because there are areas in which functioning from the economic side will simply be ineffective or completely impossible.

Interesting and informative about types of competition

During the Great Depression, Pepsi produced bottles that were twice the volume of Coca Cola for the same price.
Thus began the advertising war of eternal competitors. Article navigation

Main types of competition
Types of market competition
What is unfair competition
Fair Competition Methods
Price and non-price competition
Price competition
Non-price competition
Modern types of competition
conclusions

Subject to the laws of dialectics, everything in the world competes with each other. Living organisms, in some cases complex structures created by people, enter into the struggle for advantages, the right to expansion, comfort and profit, and, of course, competition in generating income, that is, in business, is rightfully considered its most widespread type. The article is devoted to this aspect of the phenomenon.

Monopolistic competition

Monopolistic competition, examples of which can be found in almost any sphere of the economy, is inherent in those markets in which there are many sellers. Traders sell goods with similar characteristics, but the products cannot be called identical, and they are not able to completely replace competing products.

The market in which monopolistic competition has developed has its own features that distinguish it:

The presence of various products that are similar in most characteristics. That is, the market is filled with homogeneous products. But at the same time, each has its own characteristics, and it is not 100% possible to replace it with another option.
Presence of a large number of sellers in the market. For example, there are many manufacturers of household appliances, but the products of each of them have their own technological features.
Significant competition among sellers, which is not reflected in their pricing policy, indicates that there is monopolistic competition in the market. Examples can be given for a long time, but the main thing is that there are no absolute substitute products. Let's return to the same TVs. Manufacturers are constantly improving their technologies. Even those who produce televisions with approximately the same characteristics set different prices. The buyer first of all buys not a device, but a brand that he trusts. Therefore, producers do not pay as much attention to competitors' prices as they would under perfect competition.
Relatively easy access for new sellers to enter the market. There are few barriers to this, and almost everyone who really wants to get on it will be able to do so.

Examples of types of competition that belong to the imperfect form can be found even in your phone - these are SIM cards from one of the mobile operators. It is in this area that a large number of companies are trying to attract an ever-increasing mass of customers.

Forms of competition

Competition can be fair or unfair. Fair competition uses legal and honest methods that do not contradict generally accepted norms of business organization:

The quality of the product increases.
Marketing strategy and advertising are being developed.
The price decreases or increases.
Promotions and sales are held.
Service is improving.

Unfair competition refers to any actions that are contrary to business ethics and the law, which can damage the business reputation of competitors and cause them harm. Methods of unfair competition include:

Blackmail, damage to property, bodily harm;
Industrial espionage;
Illegal use of technologies patented by competitors;
Counterfeiting competitors' products;
Creating similar names or logos that are consistent with existing trade brands;
Dissemination of false information about competitors, their products and services;
Dumping - deliberate reduction in price;
Tax evasion;
Poaching highly qualified personnel from competitors.

Oligopoly

An oligopoly is a type of competition where a small number of large sellers operate in a market and compete with each other. If 3-4 large companies are fully capable of satisfying consumer demand, then such a market will have the following characteristics of an oligopoly:

Market products can be both homogeneous and differentiated. In this case, the products of the metal rolling industry can be classified as a homogeneous oligopoly. Whatever the manufacturer, steel cannot be made unique. Such products of one company can be completely replaced by the products of another.

An example of a differentiated monopoly is the tobacco sector. Cigarettes, despite their similarity, have their own characteristics. Such a product can only be partially replaced.
High influence of sellers on the price of goods. Due to the fact that each seller occupies a fairly large segment, we can say that the policy of one such large player has a direct impact on the entire market.
Entry of new sellers into the market has barriers, but is still possible. There may be various requirements for sellers established at the legislative level, which, if met, provide access to the market.

The following examples of competitive Russia can be cited: the sector of petroleum products and other energy resources.

It is also worth highlighting several main ways or schemes through which various variants of imperfect competition appear. Some of them are completely natural, and some are created artificially by the sellers themselves or the state.

Six paths can be distinguished.

Modern types of competition

Economics as a science, despite all the changes in conceptual approaches that have occurred in recent decades, to the concept of competition, its types and methods in general retains a certain conservatism.

However, the current situation has made some corrections to the classification that has been in use for a long time, highlighting new types of market competition on a functional basis, that is, according to the results of the impact of the competition process on the general situation in the world economy:

Name by functional criterion	a brief description of
Regulatory	Competition has a regulatory impact on the volume and quality of supply, optimizing commodity flows and creating conditions for the fullest satisfaction of consumer preferences (“consumer sovereignty”). The meaning of the effect is to stimulate the production of commercially successful goods, and not to sell products made without taking into account the requirements of the market.
Allocative	The desire of businesses to effectively locate production is dictated, in particular, by the conditions of fierce competition. In the current period, there is, for example, an influx of capital to countries with better conditions created for entrepreneurship and cheaper labor.
Innovative	It appears as a stimulating factor for the introduction of the most advanced technologies and production methods.
Adaptive	It is defined as the company’s ability to adapt to changing conditions, redistribute resources and take other measures to ensure survivability in extreme conditions.
Distribution	Promotes maximum distribution of the manufactured product and expansion of effective demand. Firms pay employees decent remuneration not only because of labor competition, but also because otherwise there will be no one to sell the goods to.
Controlling	This type of competition prevents the emergence of monopoly dictates by non-administrative methods.

Taken together, all these types of competition play a stabilizing role in relation to the market at the present stage and contribute to the establishment of an equilibrium state on it.

Economic path

This path is a natural result of serious competition between major players. Gradually, enterprises absorb each other, increasing in size. Over time, there are fewer and fewer players in the market, and the influence of each of them increases.

This method is the most dangerous, since collusion between enterprises is possible to raise prices for goods, which is done regularly. The state especially monitors markets where such trends are observed in order to protect the rights of ordinary consumers and to ensure that prices are always reasonable.

The role of competition in a market economy

Each of them must be competitive itself and, in a system with the main industries, contribute to success in competition. For example, chemistry and ink production in Germany; leather processing and shoe production in Italy; electronic measuring equipment and medical equipment in the USA, etc.

Fourthly, the strategy and structure of firms, as well as the nature of competition between them. The main subject of competition in a market economy is the firm. Here it is important to take into account the historical, national characteristics of property relations, organization and management, and entrepreneurial culture.

Fifthly, the role of chance, an unexpectedly opened opportunity. There is a certain pattern at work here: those firms and countries that have the most favorable system of the four factors outlined here that ensure success in competition make the best use of an unexpected opportunity to win in competition.

Sixth, the state plays a supporting role in competition. No matter how good government policies are, they are not successful if they serve as the only source of competitiveness. The role of the state in competition becomes successful when other prerequisites for success exist, and the state enhances their importance.

All these factors make up a system, a critical analysis of which allows us to understand the reasons for leadership in competition for some and the reasons for failure for others.

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Innovation path

Some companies, while carrying out their activities, constantly improve production processes and invest in innovative technologies. All this leads to the fact that such enterprises begin to stand out from others - they can produce more goods than competitors. At the same time, less money is spent on the production of one unit of goods. This implies the possibility of reducing the price of a product, which can lead to a reduction in the price of the product in certain sectors of the market. Competitors, whether they want it or not, will also be forced to reduce prices, perhaps even working at a loss.

General concept of competition

Competition is the struggle between several enterprises in a market economy. The subject of the struggle is the best product in terms of the ideal combination of its quality and price.

Competition can serve both for good and for harm , while its role in the economy is quite high. This process should be considered based on three main criteria:

the type of industry in which it is carried out;
number of competitors;
methods of competition used.

Natural way

There are some areas in which there is so-called natural monopoly. It mainly occurs in industries where there is a seller who can independently satisfy the needs of the entire market. Moreover, using its technological capabilities, it can do this at a price that will be significantly lower than that of possible competitors.

Question 19. Functions, types and methods of competition

The main subject of competition in a market economy is the firm. Here it is important to take into account the historical, national characteristics of property relations, organization and management, and entrepreneurial culture.

All these factors make up a system, a critical analysis of which allows us to understand the reasons for leadership in competition for some and the reasons for failure for others.

The content of competition is most fully revealed when analyzing its functions.

In a modern market economy, six main functions of competition can be distinguished: 1) regulatory; 2) allocative; 3) innovative; 4) adaptation; 5) distribution; 6) controlling.

The regulatory function consists in the influence of competition on supply and the production of goods hidden behind it in order to establish their optimal correspondence to demand (consumption). With the help of precisely this function, through all the contradictions of the market, a progressive tendency to determine supply by demand (and then production by individual and social needs) makes its way. The motto of this function is the principle: produce only what you can sell, and do not try to sell what you can produce.

The allocation function of competition, otherwise called the allocation function (from the English allocation - placement), is expressed in the effective placement of the factors of production themselves (primarily labor, land and capital) in places (economic organizations and regions) where their use provides the greatest return.

The innovative function of competition is found in various manifestations of innovation (innovations), based on the achievements of scientific and technological progress and predetermining the dynamism of the actual development of subjects of a market economy.

The adaptation function is aimed at the rational adaptation of enterprises (firms) to the conditions of the internal and external environment, which allows them to move from simple self-preservation (economic survival) to expansion (expansion) of areas of economic activity.

The distribution function of competition has a direct and indirect impact on the distribution of the total volume of goods produced (gross national product) among consumers.

And finally, the control function of competition is designed to prevent the establishment of a monopolistic dictate of some market agents over others.

The entire set of the listed functions, taken in their organic unity, ensures (worse or better) the overall effectiveness of the functioning of a market economy, that it is the regime and mechanism of competition that determine the development of the market as a self-regulating and self-correcting system.

It is impossible not to notice that the functions of competition and the functions of the market largely coincide. And this is understandable: after all, competition expresses the essence of the market and the market economy.

The progressive operation of functions and success in competition are ensured by the interaction of a whole system of factors. The most important and clear system of factors in competition was considered by the American researcher M. Porter. Generalization of experience in the development of the world market economy has made it possible to identify several main factors that determine economic success in market competition.

Firstly, this is the presence of factor conditions necessary to maintain competition in this industry: sufficient capital, developed infrastructure, qualified personnel, technology, information, etc.

Secondly, the conditions of domestic demand: volume, structure of demand, level of well-being, possibilities for increasing it (income growth, changes in the structure of needs, internationalization of demand, etc.). At the same time, those countries benefit in which domestic demand gives a clearer picture for the actions of their own firms, not foreign ones, creating additional opportunities for them to achieve success in competition and making it more difficult for foreign firms to succeed.

Thirdly, related and service industries.

State path

It is one of the most negative, according to Western economists. It is typical where it is most beneficial for the state to establish complete control over everything that happens in the market. Usually, special permits are applied for market participants, without which enterprises will not be able to operate on it. In such a market, competition is completely limited or simply does not exist.

All examples of competition in the economy prove that there are patterns in the market that depend on the number of its participants, the level of government regulation of certain areas of the economy, demand, supply and other factors.

Labor market

Imperfect competition in the labor market is a complex phenomenon that includes several important factors. Note that this market sector is most susceptible to regulation in order to minimize the negative consequences of an “imperfect market”.

Regulating factors of the labor market:

State. Legislatively regulates the level of wages, preventing it from completely falling under the influence of market processes (income indexation, establishing a minimum wage, etc.).
Trade union organizations. Direct efforts to increase the level of wages for workers in the industry and region, prepare and carry out the signing of agreements between trade unions and employers - market participants, in the indicated direction.
Large firms, corporations. They set the level of remuneration for specialists, which they retain for a long time. Not interested in frequent revision of employee pay levels.

Market laws in relation to the labor market work in a special way. The sale of labor, skills and abilities is usually secured by a long-term employment contract, which provides job security to the employee, despite fluctuations in supply and demand. In addition, an individual employment contract or agreement cannot contain conditions worse than those enshrined in the collective agreement or labor legislation.

In this case, the seller receives job guarantees and is removed from market relations for the duration of the contract with the buyer.

The presence of restrictions on worse conditions in comparison with a collective agreement does not allow the employer to endlessly worsen the conditions of individual agreements by choosing the most “accommodating” sellers. This factor is most significant if there is no trade union organization.

How competition works in the example of small business

To consolidate the information presented above, it is worth giving a clear example. For this purpose, it is advisable to take a small business - it will be easier to explain the pattern of competition.

In small businesses, rivals are fought using the following accessible and completely legal methods:

Improving the quality of goods or services is one of the best ways to beat competitors.
Reduce costs (for example, logistics) in order to reduce the cost of the product.
They build a long-term marketing strategy and conduct effective advertising campaigns offline and online (contextual advertising).
They improve the service (fast delivery, quick departure of a specialist, etc.).
Extend the warranty period for goods or services.

All these methods are now found everywhere. This also includes various promotions that are so loved by domestic consumers.

As an example, it is worth considering a specific situation.

Let's take four small companies specializing in the production of dairy products. A jar of yogurt costs 65 rubles from all manufacturers. And one of the companies finds a milk supplier with a low price. Accordingly, this reduces the manufacturer’s costs and the final cost of the finished product. At the same time, the quality remains the same. In turn, consumers will give their preference to yogurt that is cheaper than similar yogurts from other manufacturers. As they say: If there is no difference, then why pay more?

This was an example regarding goods. Now it’s worth considering an example with services.

Let's take four beauty salons operating in the same city. Of the four salons, only one sends its employees to training and advanced training courses, thereby expanding the range of services offered. Who will get more customers? The answer is obvious.