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Economics Discussion

Top Six
Characteristics of
Imperfect
Competition
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Some of the main characteristics of

Imperfect Competition are as
follows:

The concept of imperfect competition was

propounded in 1933 in England by Mrs.
Joan Robinson and in America by E.H.
Chamberlin.

It is an important market category where

the individual firms exercise their control
over the price to a smaller or larger degree.
Prof. Chamberlin called it “Monopolistic
competition”.

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Under imperfect competition, there are

large number of buyers and sellers. Each
seller can follow its own price-output
policy. Each producer produces the
differentiated product, which are close
substitutes of each other. Thus, the demand
curve under monopolistic competition is
highly elastic.

Characteristics:
1. Large number of Sellers and
Buyers:

There are large numbers of sellers in the

market. All these firms are small sized. It
means that each firm produces or sells such
an insignificant portion of the total output
or sale that it cannot influence the market
price by its individual action. No firm can
affect the sales of any other firm either by
increasing or reducing its output; so there
is no reaction from other firms. Every firm
acts independently without bothering about
the reactions of its rivals. There are a large
number of buyers and none of them can
affect price by his individual action.

2. Product Differentiation:

Another important characteristic is product

differentiation. The product of each seller
may be similar to, but not identical with the
product of other sellers in the industry. For
example, a packet of Verka butter may be
similar in kind to another packet of Vita
butter, but because of the idea that there
are differences, real or imaginary, in the
quality of these two products, each buyer
may have a definite preference for the one
rather than for the other. As a result, each
firm will have a group of buyers who prefer,
for one reason or another, the product of
that particular firm.

3. Selling Costs:

Another important characteristic of the

monopolistic competition is existence of
selling costs. Since there is product
differentiation and products are close
substitutes, selling costs are important to
persuade buyers to change their
preferences, so as to raise their demand for
a given article. Under monopolistic
competition, advertisement is not only
persuasive but also informatory because a
large number of firms are operating in the
market and buyer’s knowledge about the
market is not perfect.

4. Free Entry and exit of Firms:

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Firms under monopolistic competition are

free to join and leave the industry at any
 time they like to. The implication of this
characteristic is that by entering freely into
the market, the firms can produce close
substitutes and increase the supply of
commodity in the market. Similarly, the
firm commands such a meager amount of
resources that in the event of losses, they
may easily quit the market.

5. Price-makers:

In the monopolistic competitive market,

each firm is a price-maker as it can
determine the price of its own brand of the
product.

6. Blend of Competition and

Monopoly:
In this market, each firm has a monopoly
power over its product as it would not lose
all customers if it raises the price as its
product is not perfect substitute of other
brands. At the same time, there is an
element of competition because the
consumers treat the different firms’
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