Imperfect Competition

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Imperfect competition in economics refers to a competition in which conditions necessary for perfect competition are violated. Common situations for imperfect competition include:

  • Monopoly
  • Oligopoly
  • Monopolistic Competition
  • Information Asymmetry

In international trade, the most common cause for imperfect competition is the implementation of trade barriers.

Trade barriers are a general term that describes any government policy or regulation that restricts international trade. The barriers can take many forms, including the following terms that include many restrictions in international trade within multiple countries that import and export any items of trade:

  • Tariffs
  • Non-tariff barriers to trade
  • Import licenses
  • Export licenses
  • Import quotas
  • Subsidies
  • Voluntary Export Restraints
  • Local content requirements
  • Embargo

Most trade barriers work on the same principle: the imposition of some sort of cost on trade that raises the price of the traded products. If two or more nations repeatedly use trade barriers against each other, then a trade war results.

Economists generally agree that trade barriers are detrimental and decrease overall economic efficiency, this can be explained by the theory of comparative advantage. In theory, free trade involves the removal of all such barriers, except perhaps those considered necessary for health or national security. In practice, however, even those countries promoting free trade heavily subsidize certain industries, such as agriculture and steel.

Trade barriers are often criticized for the effect they have on the developing world. Because rich-country players call most of the shots and set trade policies, goods such as crops that developing countries are best at producing still face high barriers. Trade barriers such as taxes on food imports or subsidies for farmers in developed economies lead to overproduction and dumping on world markets, thus lowering prices and hurting poor-country farmers. Tariffs also tend to be anti-poor, with low rates for raw commodities and high rates for labor-intensive processed goods. The Commitment to Development Index measures the effect that rich country trade policies actually have on the developing world.