In economic theory, imperfect competition is a type of market structure showing some but not all features of competitive markets.
What is ‘Imperfect Competition’
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.
Explaining ‘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.
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.
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.
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- Imperfect competition in the interbank market for liquidity as a rationale for central banking – www.aeaweb.org [PDF]
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- Liquidity and asset returns under asymmetric information and imperfect competition – academic.oup.com [PDF]
- Imperfect competition, risk taking, and regulation in banking – www.sciencedirect.com [PDF]
- Pass-through as an economic tool: Principles of incidence under imperfect competition – www.journals.uchicago.edu [PDF]