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Unit IV Part C Imperfect Competition For Principles Of Micro Economics Bcom Sem 1 Delhi University  Study Notes

Unit IV Part C Imperfect Competition For Principles Of Micro Economics Bcom Sem 1 Delhi University  : Imperfect competition exists whenever a market, hypothetical or real, violates the abstract tenets of neoclassical pure or perfect competition. Since all real markets exist outside of the plane of the perfect competition model, each can be classified as imperfect. The contemporary theory of imperfect versus perfect competition stems from the Cambridge tradition of post-classical economic thought.

In economic theory, imperfect competition is a type of market structure showing some but not all features of competitive markets.

Forms of imperfect competition include:

  • Oligopoly, competition among 10
  • Monopolistic competition, in which there are many sellers producing highly differentiated products.
  • Monopoly, where there are many buyers but only one seller.
  • Monopsony, where there are many sellers but one buyer.
  • Oligopsony, where there are many sellers but few buyers.
  • Duopoly, competition among 2.

Download here Unit IV Part C Imperfect Competition For Principles Of Micro Economics Bcom Semester 1 Delhi University  Study Notes in pdf format 

Unit IV Part C Imperfect Competition For Principles Of Micro Economics Bcom Sem 1 Delhi University  Study Notes

Unit IV Part C Imperfect Competition For Principles Of Micro Economics Bcom Sem 1 Delhi University  : Real world’ competition that is less effective in lowering price levels nearer to the cost levels than the theoretical perfect competition. Conditions that help cause imperfect competition include (1) restricted flow of information on costs and prices, (2) near monopoly power of some suppliers, (3) collusion among sellers to keep prices high, and (4) discrimination by sellers among buyers on the basis of their buying power.

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BREAKING DOWN ‘Imperfect Competition’

The treatment of perfect competition models in economics, along with modern conceptions of monopoly, were founded by the French mathematician Augustin Cournot in his 1838 “Researches Ito the Mathematical Principles of the Theory of Wealth.” His ideas were adopted and popularized by the Swiss economist Leon Walras, considered by many to be the founder of modern mathematical economics.

Prior to Walras and Cournot, mathematicians had a difficult time modeling economic relationships or creating reliable equations. The new perfect competition model simplified economic competition to a purely predictive and static state. This avoided many problems that exist in real markets, such as imperfect human knowledge, barriers to entry and monopoly.

The mathematical approach gained widespread academic acceptance, particularly in England. Any deviation from the new model of perfect competition was considered a troublesome violation of the new economic understanding.

The New Language of Perfect and Imperfect Competition

One Englishman in particular, William Stanley Jevons, took the ideas of perfect competition and argued that competition was most useful not only when free of price discrimination, but also a small number of buyers or large number of sellers in a given industry.

Thanks to the influences of Jevons, the Cambridge tradition of economics adopted a whole new language for potential distortions in economic markets – some real and some only theoretical. Among these problems were oligopoly, monopolistic competition, monopsony and oligopsony.

Much of the new economic language and analysis was parodied from physics, particularly a focus on indefinite multiplicity, divisibility, infinity and infinitesimally small actors in an equation. Even today, the basic graphs and equations shown in most Economics 101 textbooks hail from these mathematical derivations.

Unit IV Part C Imperfect Competition For Principles Of Micro Economics Bcom Sem 1 Delhi University  Study Notes

Unit IV Part C Imperfect Competition For Principles Of Micro Economics Bcom Sem 1 Delhi University  :  We analyze a model of costly private information acquisition and asset pricing under imperfect competition. We show that imperfect competition generally creates strategic complementarity in traders’ information acquisition decisions. The source of strategic complementarity is the change in the liquidity of the risky asset that arises from a change in the precision of a private signal: when an uninformed trader becomes informed, the liquidity of the risky asset generally increases. The increase in liquidity encourages more private information acquisition by informed traders. We also show that imperfect competition can shut down private information acquisition, leading to significant illiquidity and volatility. This finding implies that excess return volatility can be observed in markets with low information asymmetry.

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Keywords: Imperfect competition, Information production, Excess volatility, Information complementarity, Adverse selection

Problems With Concepts of Imperfect Competition

The Cambridge school’s wholesale devotion to creating a static and mathematically calculable economic science had its drawbacks. Ironically, a perfectly competitive market would require the absence of competition. All sellers in a perfect market must sell exactly similar goods at identical prices to the exact same consumers, all of whom possess the same perfect knowledge. There is no room for advertising, product differentiation, innovation or brand identification in perfect competition.

No real market can or could attain the characteristics of a perfectly competitive market. The pure competition model ignores many factors, including the limited deployment of physical capital and capital investment, entrepreneurial activity and changes in the availability of scarce resources. Other economists have adopted more flexible and less mathematically rigid theories of competition, such as the evenly rotating economy, though the language created by the Cambridge tradition still predominates the discipline.

Unit IV Part C Imperfect Competition For Principles Of Micro Economics Bcom Sem 1 Delhi University  Study Notes

Unit IV Part C Imperfect Competition For Principles Of Micro Economics Bcom Sem 1 Delhi University  :  Difference Between Perfect and Imperfect Competition.

Competition is very common and often times very aggressive in a free market place where a large number of buyers and sellers interact with one another. Economic theory describes a number of market competitive structures that takes into account the differences in the number of buyers, sellers, products sold, and prices charged. There are two extreme forms of market competitive conditions; namely, perfectly competitive and imperfectly competitive. The following article provides a clear overview of each type of market competitive structures and provides an explanation of how they are different to one another.

What is Perfect Competition?

Perfect competition is where the sellers within a market place do not have any distinct advantage over the other sellers since they sell a homogeneous product at similar prices. There are many buyers and sellers, and since the products are very similar in nature there is little competition as the buyer’s needs could be satisfied by the products sold by any seller in the market place. Since there are a large number of sellers each seller will have smaller market share, and it is impossible for one or few sellers to dominate in such a market structure.

Perfectly competitive market places also have very low barriers to entry; any seller can enter the market place and start selling the product. Prices are determined by the forces of demand and supply and, therefore, all sellers must conform to a similar price level. Any company that increases the price over competitors will lose market share since the buyer can easily switch to the competitor’s product.

What is Imperfect Competition?

Imperfect competition as the word suggests is a market structure in which the conditions for perfect competition are not satisfied. This refers to a number of extreme market conditions including monopoly, oligopoly, monopsony, oligopsony and monopolistic competition. Oligopoly refers to a market structure in which a small number of sellers compete with each other and offer a similar product to a large number of buyers. Since the products are so similar in nature, there is intense competition among market players, and high barriers to entry since most new firms may not have the capital, technology to startup.

A monopoly is where one firm will control the entire market place, and will hold 100% market share. The firm in a monopoly market will have control over the product, price, features, etc. Such firms usually hold a patented product, proprietary knowledge/technology or holds access to a single important resource. Monospsony is where there are many sellers in the market with just one buyer and oligopsony is where there are a large number of sellers and a small number of buyers. Monopolistic competition is where 2 firms within a market place sell differentiated products that cannot be used as substitutes to each other.

Perfect vs Imperfect Competition

Perfect and Imperfectly competitive markets are very different to one another in terms of the different market conditions that need to be satisfied. The main difference is that, in a perfectly competitive market place, the competitive conditions are much less intense, than any other form of imperfect competition. Furthermore, a perfectly competitive market structure is healthier as buyers have enough options to select from and aren’t, therefore, pressured to purchase one / few products and sellers are able to enter/exit as they please, which is opposite to most market conditions within an imperfectly competitive market place.

Summary

• There are two extreme forms of market competitive conditions; namely, perfectly competitive and imperfectly competitive.

• Perfect competition is where the sellers within a market place do not have any distinct advantage over the other sellers since they sell a homogeneous product at similar prices.

• Imperfect competition as the word suggests is a market structure in which the conditions for perfect competition are not satisfied. This refers to a number of extreme market conditions including monopoly, oligopoly, monopsony, oligopsony and monopolistic competition.

Unit IV Part C Imperfect Competition For Principles Of Micro Economics Bcom Sem 1 Delhi University  Study Notes

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