Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What defines an imperfect competition market structure?

1. Many firms with identical products

2. All firms are price takers

3. Not meeting the conditions of perfect competition

4. Only one buyer and many sellers

The correct answer is: Not meeting the conditions of perfect competition

The definition of an imperfect competition market structure is rooted in its deviation from the characteristics of perfect competition. In a perfectly competitive market, many firms produce identical products, all participants are price takers, and there are no barriers to entry or exit. However, imperfect competition arises when these ideal conditions are not fully met. In imperfect competition, various features can include having a small number of firms, differentiated products, some degree of market power, barriers to entry, and the ability for firms to influence prices rather than accept them as given. The market structure can encompass monopolistic competition, oligopoly, and monopoly—all scenarios where firms have varying degrees of pricing power and product differentiation. Other alternatives presented, such as many firms with identical products, describe characteristics of perfect competition rather than imperfect competition, while the description of all firms being price takers aligns with perfect competition as well. Having only one buyer and many sellers characterizes a monopsony, which is a different market structure altogether. Hence, the option that encompasses the essence of imperfect competition is that it doesn't fully meet the stringent criteria outlined for perfect competition.