Question

Please explain the costs to society of imperfect competition (pricing power).

Answer 1

Imperfect competition refers to any economic market which does not comply with the strict requirements of a fully or strictly free market. In this setting, businesses sell various goods and services, set individual prices, compete for market share and are also covered by barriers to entry and exit.

It is instantly evident that very few companies in the real world work in this way, with maybe a few exceptions, such as flea vendors or farmers. If and when the above factors are not met, competition is said to be imperfect it is called this way, since distinction results in some firms having an advantage over others, allowing them to achieve higher profits than competitors, often at the expense of consumers.

Competition is driving innovation. Competition also drives prices that have an impact on costs.

When prices fall to capture more of the market, this can only happen if costs are reduced. Costs are reduced by the creation of increased production capacity. Better systems, just-in-time subsets required for output. Better sites for distribution minimize prices. The use of high-tech manufacturing eliminates labor and uses robots.

Price cuts often reduce the amount of waste in the supply chain of the manufactured products sold.