Perfect competition and monopoly are rarely found in the real world and thus they do not represent, for the most part, the actual market situations. Therefore, the conclusions which follow from the theories of pure competition were found to be inapplicable to the behavior of business firms in the actual world. For instance, in the real world, firms were found to be enjoying internal economies of scale which were incompatible with the theory of perfect competition. The urgent need was therefore felt to reformulate the theory of price so as to bring it nearer to the actual world. This was accomplished and brought out simultaneously “the theory of monopolistic competition” and “ the economies of imperfect competition” respectively.
The nutshell of these theories, especially of the theory of monopolistic competition, is that the pure competition and pure monopoly are the two opposite limiting cases, lying between which is a series of intermediate cases, which differ from each other in relative strengths of monopoly and competitive elements or in other words degrees of imperfection. It may be noted that the existing limit of monopoly is reached when a seller does not face competition from any substitute of others to some extent. It follows that some extent when a single person or agency comes to have a control over the supply of all economic goods. At the other extreme is pure or perfect competition in which case an individual of all economic goods. At the products which are perfect substitutes of his own product since products of all sellers are completely identical or homogeneous. Between these two extremes of pure monopoly and pure competition, there are all gradations in which both the monopolistic and competitive elements are present. In the terminology pure monopoly in the sense of a single seller of a product which has got no close substitutes is an extreme form of imperfect competition.
The fundamental distinguishing feature of imperfect competition is that unlike that under perfect or pure competition, the demand curve confirming an individual firm under it slopes downward. As a result, the marginal revenue curve lies below it. Marginal revenue curve plays such a crucial role because of its definite relation with price and elasticity. It is the nature of this relation which distinguishes a state of competition that is pure from one that is impure or imperfect. The difference between marginal revenue and price at an output level depends upon the size of price elasticity of demand is infinite. Therefore, the differences between the price and marginal revenue at equilibrium output is regarded as the degree of equilibrium output is regarded as the degree of imperfection or degree of monopoly. Thus, the relative magnitudes of price and marginal revenue at equilibrium output help us to distinguish between different degrees of imperfection or monopoly element and vice versa.