This paper analyses imperfect competition in a spatial model that is applied to the European dairy industry. We show how imperfect competition can be introduced within the dairy industry model developed by Bouamra et al. (2002). We then simulate four scenarios that differ in the assumptions on competition. We show that the existence of market power significantly modifies the implicit price of milk components, may lead to an increase in EU exports and that domestic prices are not adequate indicators of competitiveness in the presence of market power. Distribution in surplus among agents is changed and large welfare losses may be generated.