4.1 Introduction to Imperfectly Competitive Markets

What is imperfect competition?

Imperfectly competitive markets lack one or more conditions of perfect competition — many differ in number of firms, product type, or barriers to entry. Unlike perfect competition, firms here have some market power, meaning they can influence price rather than just accept it. The four market structures range from monopolistic competition to monopoly.

Market power and price makers

Firms with market power face downward-sloping demand curves for their own product, unlike perfectly competitive firms who face perfectly elastic (horizontal) demand. This makes them price makers, not price takers. Because they control some price-setting ability, marginal revenue no longer equals price — MR < P for any unit sold beyond the first.

Spectrum of market structures

Market structures form a spectrum based on number of firms, product differentiation, and barriers to entry: perfect competition (many firms, identical goods, no barriers) → monopolistic competition (many firms, differentiated goods, low barriers) → oligopoly (few firms, interdependent) → monopoly (one firm, high barriers). Less competition generally means more market power.

Key terms

Imperfect competition

A market structure where at least one condition of perfect competition (many firms, identical products, free entry/exit) is not satisfied.

Market power

A firm's ability to influence the price of its product rather than simply accepting the market price.

Price maker

A firm that can set its own price due to market power, common in imperfectly competitive markets.

Downward-sloping demand curve

The demand curve faced by firms with market power; shows they must lower price to sell more output.

Spectrum of market structures

Ranges from perfect competition to monopolistic competition, oligopoly, and monopoly, based on firm number, differentiation, and entry barriers.

Try an AP-style question

Why is marginal revenue below price for an imperfectly competitive firm?

1. Its demand is perfectly elastic
2. Its costs are higher than rivals'
3. It is a price taker in the market
4. It must cut price on all units