What Is an Imperfect Market?

An imperfect market refers to any economic market

economic market
A market economy is an economic system in which economic decisions and the pricing of goods and services are guided by the interactions of a country’s individual citizens and businesses.

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that does not meet the rigorous standards of the hypothetical perfectly—or purely—competitive market. Pure or perfect competition is an abstract, theoretical market structure in which a series of criteria are met.

Market Structure No of Sellers Barriers to Entry
Monopolistic Many Low
Oligopoly Market Few Big Companies High
Monopoly Market One Very High
Monopsony Market Single Buyer Many Sellers Very High

Perfect and imperfect competition

How imperfect markets function

The phrase “imperfect market” could refer to a market that is different from typical markets. However, every market in the real world is imperfect to some extent. This means that because every market is imperfect, there will always be competition for market share or a desire to innovate and develop superior products to those offered by the competition.

Although there are no perfect markets in the real world, economists can still use the idea of the perfect market to simulate pricing or economic incentives. A market only needs to violate one of the requirements of an ideal market to be deemed imperfect.

What is an imperfect market?

An economic market is said to be imperfect if it differs in some way from a perfect market or a perfect competitive environment. The following are some examples of how economists might define an imperfect market:

Effects of imperfect markets

Depending on how imperfect the markets are and how far they deviate from the ideal market standard, the effects of imperfect markets can vary. Insufficient competition within a market can result in one or a few companies controlling the market. These businesses may then decide to price their products and services at a level that makes it challenging for rival businesses to enter the market. As an alternative, businesses that create a variety of products can promote creativity and innovation, which may ultimately benefit customers.

Types of imperfect markets

There are a number of different types of imperfect markets. These include:

Monopolies

A monopoly is an imperfect market in which there is just one supplier, or just one supplier who has an utterly dominant market share, for a given good or service. This business is free to set its own prices and alter them whenever it wants. There is no competition because it is the sole provider of the good or service, and there are no alternatives available. When one company holds a monopoly over a certain market, the entry barrier to that market is typically very high.

Monopolistic competition

There is monopolistic competition when there are numerous companies competing for the same non-substitutable market space. Although there is more choice for customers in this market, each business is free to set its own prices and make business decisions without taking into account those of the competing firms. Additionally, the business decisions made by each company might not have an impact on the other businesses in the market.

The pizza restaurant market is an illustration of this kind of arrangement. Since each pizza recipe and style may differ, each pizza restaurant offers a comparable but unreplaceable product. Through marketing and advertising, the restaurants can compete for customers, but their pricing policies and business models are distinct from one another.

Duopoly

A monopoly and a duopoly are similar in that only two businesses control the market. Similar to a monopoly, these two businesses set market prices and have the power to impose significant barriers to entry. However, unlike a monopoly, there is more competition because the two businesses might provide interchangeable, similar goods or services.

Oligopolies

A market with an imperfect oligopoly has fewer than two companies operating there, but there are still a few. These few businesses may work together to establish prices within the market, or, similar to a cartel, one business may dominate and establish prices that the others follow. Oil companies and mobile phone service providers are two examples of oligopolies in the US.

Monopsonies

An unusual form of imperfect market called a monopsony occurs when there is only one buyer, or one dominant buyer, for a good or service. Because they are the only customer for that product, they have a lot of negotiating power when it comes to contracts and price setting. The customer can profit from the desire of the numerous businesses that provide that product to compete for customers. Governments in most nations occasionally behave as monopolies, for instance, when purchasing supplies and equipment for the military.

Oligopsonies

When multiple businesses offer the same good or service, there are few customers for it in an imperfect oligopsony market. These few customers, like those in a monopsony, wield enormous power because they can spur competition among businesses, forcing them to provide goods and services at discount prices. Additionally, they can bargain for supply terms that benefit customers the most.

The tobacco industry is one example of an oligopoly because it relies on a small number of companies to buy tobacco from a variety of growers around the world to make cigarettes, cigars, and other goods. Another instance is the US publishing sector, where five large publishers control the market and are able to provide authors, who are the providers of goods and services, with sizable advances and alluring publication and distribution packages.

Imperfect markets vs. perfect markets

Perfect markets are imagined or idealized markets that meet the following criteria:

While some markets, like a flea market or a farmers market, might seem to meet all of these requirements, in reality, every market falls short of at least one of them. This is why the perfect market is only theoretical. Most, if not all, real-world markets are, therefore, imperfect markets.

FAQ

What is the example of imperfect market?

Here are several examples of imperfect markets: Monopolies and oligopolies. If a company has a monopoly, it may be able to charge prices that are excessive by conventional standards. The same problem occurs in an oligopoly, where there are so few competitors that price competition is useless.

What is perfect and imperfect market?

Perfect competition, market equilibrium, and an endless supply of buyers and sellers define a perfect market. The strict requirements of a fictitious perfectly or purely competitive market are not met by imperfect markets.

What are the four types of imperfect market?

Forms of Imperfect Competition
  • Many businesses compete with slightly different goods under monopolistic conditions.
  • Monopoly: A corporation that has no competition in its business.
  • Oligopoly: This is a market with only a few firms.
  • Monopsony: A single-buyer market and many sellers.

What is a imperfect competitive market?

Imperfect competition, as opposed to perfect competition, is a competitive market situation where there are many sellers but they are offering a variety of (dissimilar) goods. Competitive markets that are inherently flawed, as the name implies

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