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Imperfect Competition



Competition is less than perfect in several types of markets. Imperfectly competitive markets can take a variety of forms. The most extreme example is a monopoly, where a single firm dominates the market for a good, but there are other market structures that also lead to imperfect competition. An oligopoly is a market dominated by a few large firms. An oligopoly in which only two large firms dominate the market is called a duopoly. A cartel, which is illegal in the United States, involves several independent producers banding together to fix prices or reduce output to maximize their profits at the expense of the consumer. In another type of market structure, monopolistic competition, many firms that produce a good of equal value to consumers compete through product differentiation, seeking to make their product look different from the others. In the long run, as more firms enter such a market, competitive forces tend to drive economic profits to zero but will leave the market inefficien.

At A Glance

  • An oligopoly is a market dominated by a few large firms.
  • A duopoly is a market structure dominated by two large firms.
  • A cartel is a group of independent producers who collude to restrict output, maintain high prices, and maximize their joint revenue.
  • In monopolistic competition, many firms sell products that are not perfect substitutes for one another because of product differentiation.
  • Product differentiation is the creation of distinguishing features of a product so competing products are not regarded as close substitutes.
  • A firm reaches long-run equilibrium at the point where the long-run marginal cost equals the marginal revenue at a point corresponding to the quantity of output at which the long-run average cost curve touches the demand curve.
  • The entry of new firms into a market characterized by monopolistic competition reduces the economic profit of an existing firm to zero.