Pure Competition
Pure competition comes close to the ideal of perfection without completely attaining it. Under pure competition, information as to present and prospective conditions of supply and demand may be imperfect or unequally distributed; custom may restrain complete independence of action; friction may impede the movement of capital between industries, products, and firms; minor obstacles may limit access to and withdrawal from the field. But other of the conditions of perfect competition must be preserved; commodities must be standardized; sellers and buyers must be numerous and small; no one of them may control enough of the supply or the demand appreciably to affect the price; each of them must take price as given and adjust his output or purchases to it. Pure competition is said to characterize the organized commodities markets and the securities exchanges. But even here individual traders or groups of traders acting in concert have been known to control enough of the supply or the demand to manipulate the price. Pure competition undoubtedly does exist, but its occurrence is comparatively rare.
Imperfect Competition
Imperfect competition involves a more serious departure from one or more of the requirements of perfection. Information may be hidden from traders, the composition of commodities and the prices at which sales are made kept secret. Restrictive contracts, the conventions of the trade, or the fear of reprisals by competitors may inhibit freedom of action. Serious obstacles may check the mobility of capital, hinder entrance to the field, or delay elimination from it. The conditions requisite to pure, as well as to perfect, competition may likewise be lacking. The product sold by each seller, though essentially like that sold by every other, may be so differentiated that buyers will be unwilling to shift quickly from one to another. If one seller sets his price above the market level he will not lose all of his trade to the others; if he sets it below the market level he will not attract all of their trade to himself. He may fix his price, within limits, therefore, at any figure he chooses. Sellers, moreover, may be few in number and any one of them of such size that an increase or decrease in his output will appreciably affect the prospective price. In this case, the seller, instead of taking price as given and carrying production up to the point where the cost of an additional unit would equal the income derived from its sale, will consider the probable effect of variations in production upon the price and adjust his output accordingly. His production policy will therefore differ from that which would be followed by a seller under the conditions of perfect or pure competition. A comparable situation
may obtain on the buyers' side of the market. Conditions such as these make for imperfection in competition. And since such conditions are present, to a greater or lesser extent, in many if not in most markets, it must be recognized that the occurrence of imperfect competition is common.
Monopolistic Competition
Monopolistic competition is the form of imperfect competition which results from the differentiation of products by sellers. Under monopolistic competition, sellers may be numerous and no one of them may control a major part of the supply of the common commodity which all of them are offering for sale. But each seller may so differentiate his portion of the supply of that commodity from the portions sold by others that buyers will hesitate to shift their purchases from his product to that of another in response to differences in price. Products serving a common purpose may be individualized by variations in their composition, in the sizes of the units in which they are sold, in the services which accompany the sale, in style, and in such superficial matters as packaging, brand names, and sales appeal. Such differentiation may enable one buyer to charge more than another, and even to advance his price, without losing sales, always, however, within the limits set by the availability of products which may be readily substituted for his own. Monopolistic competition is thus monopolistic only up to the point where substitution takes place and competitive only beyond that point. It obtains in many markets; probably in a majority of the markets for manufactured consumers' goods in the United States.
Non-Price Competition
Perfect and pure competition, since they require commodity standardization, pertain to competition in price alone. Imperfect and monopolistic competition, since they permit product differentiation, pertain also to sellers competition in quality, in service, in style, and in advertising and salesmanship. Competition in quality and in service may be quite as effective in giving the buyer more for his money as is competition in price.
Competition in service, however, may compel the buyer to pay for something he does not use or want as a condition of obtaining the commodity he desires. Competition in style may give satisfaction to the buyer, but it may also destroy the value of the goods he purchases by hastening their obsolescence. Competition in advertising and salesmanship are necessary concomitants of competition in quality, service, and style, but they may not, in themselves, give the buyer a value which is equal to their cost. Each of these forms of competition is a common feature of the markets for manufactured consumers' goods.