Perfect and imperfect competition

In this topic, we will discuss the difference between perfect and imperfect competition, and explain how imperfect competition may have affected the growth and development of the telecommunications sector in Malaysia.

3.1 The difference between perfect and imperfect competition

It is traditional to divide industries into categories according to the degree of competition that exists between the firms within the industry. There are four such categories.

At one extreme is perfect competition, where there are very many firms competing (Sloman J. 2003). Each firm is so small relative to the whole industry that it has no power to influence price. It is a price taker. At the other extreme is monopoly, where there is just one firm in the industry, and hence on competition from within the industry. In the middle come monopolistic competition, which involves quite a lot of firms competing and where is freedom for new firms to enter the industry, and oligopoly, which involves only a few firms and where entry of new firms is restricted. Imperfect competition means the collective name for monopolistic competition and oligopoly. Table 3.1 shows the differences between the four categories (Sloman J. 2003, p. 149).

Table 3.1 feature of the four market structures (Sloman J. 2003, p. 149).

Type of market Number of firms Freedom of entry Nature of product Implication for demand curve for firm

Perfect competition Very many Unrestricted Homogeneous Horizontal. The firm is a price taker.

Monopolistic competition Many/several Unrestricted Differentiated Downward sloping, but relatively elastic. The firm has some control over price.

Oligopoly Few Restricted Undifferentiated or differentiated Downward sloping, relatively inelastic but depends on reactions of rivals to a price change.

Monopoly One Restricted or complete blocked Unique Downward sloping, more inelastic than oligopoly, the firm has considerable control over price.

3.2 Which is more suited for the growth and development of the telecommunications sector in Malaysia

Perfect competition may be less desirable than other imperfect competition market:

Even though firms under perfect competition may seem to have an incentive to develop new technology, they may not be able to afford the necessary research and development. Also, they may be afraid that if they did develop new more efficient methods of production, their rivals would merely copy them, in which case the investment would have been a waste of money.

Perfectly competition industries produce undifferentiated products. This lack of variety might be seen as a disadvantage to the consumer.

In Malaysia, telecommunications market is imperfect competition. There are few firms in telecommunications market, for example Maxis, Digi and Celcom etc. There are various barriers to the entry of new firms. Malaysia telecommunications market is under oligopoly. Because there are only a few firms in this market, they are interdependent.

Thus, imperfect competition can have some advantages to suit for the growth and development of the telecommunications sector in Malaysia:

The imperfect competition may be able to achieve substantial economies of scale due to lager firm, centralised administration and the avoidance od unnecessary duplication. (E.g. a telecommunications company would eliminate the need for several sets of transmission lines under each street). If this result in an MC curve substantially bellows that of the same industry under perfect competition, the oligopolist will produce a high output at a lower price (Sloman J. 2003).

Oligopolists, like Maxis, use part of their supernormal profit for research and development. Unlike monopolists, however, oligopolists will have a considerable incentive to do so. If the product design is improved, this may allow the firm to capture a larger share of the market, and it may be some time before rivals can respond with a similarly improved product. If, in addition, costs are lowered by technological improvement the firm’s capacity to withstand any price war.

Non-price competition through product differentiation may result in greater choice for the consumer. Take the case between Maxis and Digi. Non-price competition has led to a huge range of different value set for different consumers.