Pricing in Imperfect Competition

Imperfect competition emerges in situations where there is neither pure competition nor pure monopoly. The situation of imperfect competition is the real world that lies between these two extremes. Imperfect competition may be in several forms.

We can not define imperfect competition in a single case there are various situations representing imperfect competition. Here, we shall understand the  Price Determination under Imperfect Competition.

Price Determination under Imperfect Competition

In this article, we shall take up two forms of imperfect competition:

(a) Monopoly

(b) Monopolistic competition

Monopoly

There is only one firm prevailing in a particular industry called A Monopoly Market Structure. When a single firm controls 25% or more of a particular market is known as monopoly power from a regulatory view. Indian Railway is an example.

A Natural Monopoly Market Structure comprises various natural advantages like strategic location and/or abundant mineral resources.

Various gulf countries have a monopoly in crude oil exploration because of abundant naturally occurring oil resources.

Key features of a Monopoly Market Structure

• Lack of Substitutes
• Barriers to Entry
• Competition
• Price Maker
• Profits structure

1. Lack of Substitutes 

In monopoly structure firms normally produce a good without close substitutes. The product is generally often specific and unique.

For example, when Apple started producing the iPad, it arguably had a monopoly over the tablet market.

2. Barriers to Entry

There are significant barriers exists to entry set up by the monopolist. If new firms want to enter the industry, the monopolist will not have complete control of a firm on the supply.

This implies that there is no differ­ence between a firm and an industry Under monopoly.

3. Competition

In a monopoly market structure, there are no close competitors in the market for that product.

4. Price Maker

The term Price Determination under Imperfect Competition symbolizes monopoly market. The monopolistic sets the price of the product. Since it has market power,  This power makes the monopolist a price maker.

5. Profits 

A monopolist can maintain supernormal profits in the long run but it not necessary that he earns profits too. He can be making a loss or maximizing revenues. This can never happen under perfect competition.

In the case where the abnormal profits are available in the long run, other firms will also enter the market and as a result, abnormal profits will be eliminated.

Source: freepik.com

Monopolistic Competition

Monopolistic competition is a market structure which has elements of both monopoly and competitive markets.

Essentially a monopolistic competitive market provides freedom of entry and exit, but sellers can differentiate their products. They can set prices because they have an inelastic demand curve.

However, since there is freedom of entry, supernormal profits may encourage more firms to enter the market leading to normal profits in the long term.

The diagram for a monopolistic competition is the same as for a monopoly in the short run.

Supernormal profit encourages new firms to enter in the long run. This reduces existing demand for existing firms and leads to normal profit.

The efficiency of firms in monopolistic competition

Key features of a Monopolistic Competitive Industry

• There are many firms.
• Freedom of entry and exit.
• Firms manufacture differentiated goods.
• Firms have price inelastic demand, therefore, they are price makers because the good is highly differentiated.
• They earn normal profits in the long run but could make supernormal profits in the short term.
• Dynamic efficiency is possible as firms have excess profit to invest in research and development.
• In a monopolistic competitive industry, this is possible the firm does face competitive pressures to cut cost and provide better products.

Examples of Monopolistic Competition

• Restaurants – Generally restaurants compete on quality and as much as the price of food. Product differentiation is a key element of the restaurant business. There are relatively low barriers to entry in opening a new restaurant.
• Saloon-A service which provides a reputation to firms for the quality of their hair-cutting.
• Fashion Industry-In cloths industry, designer label clothes are about the brand and product differentiation.
• TV programmes – Around the world globalization has increased the diversity of television programmes from networks. Consumers can choose programs between domestic channels and also imports from other countries such as Netflix.

Question on Price Determination under Imperfect Competition

Q.All of the following are characteristics of a monopoly market except:

1. There is only a single firm.
2. The firm is a price taker.
3. The firm manufactures a unique product.
4. There is an existence of some advertising.

Ans. Solution: (b)

In a monopoly, the firm may use its monopolistic powers to realize high revenue, Hence, he is not a price-taker but a price maker. Therefore, option b is the correct option since it is not a characteristic of a monopoly.