ABSTRACT
Imperfect competition occurs when sellers have sufficient market power to charge prices above marginal cost, limit the quantity produced, or produce goods of inferior quality. These practices can lead to an inefficient allocation of resources that does not equate marginal cost and marginal benefit—one of the essential criteria for efficiency. Market power has its virtues as well. The ability of a monopoly to sustain profits in the long run is a clear incentive for innovation. When a competitive market would produce too much of a good such as petroleum due to negative externalities, the lower quantities resulting from market power might be closer to the best quantities for society. Antitrust legislation also leaves room for natural monopolies, which are firms with such high start-up costs that it is difficult for several firms to share the same market. English economist Ronald Coase suggested that market failure will not result from externalities if the affected parties can bargain to an efficient solution.
