Select your language

Suggested languages for you:
Log In Start studying!
StudySmarter - The all-in-one study app.
4.8 • +11k Ratings
More than 3 Million Downloads
Free
|
|

All-in-one learning app

  • Flashcards
  • NotesNotes
  • ExplanationsExplanations
  • Study Planner
  • Textbook solutions
Start studying

Imperfect Market

Save Save
Print Print
Edit Edit
Sign up to use all features for free. Sign up now
Economics

Imagine you want to buy a second-hand Toyota from someone who you met in an online marketplace for second-hand cars. To what extent can you negotiate the price and bring it down? Will the seller disclose all the information about the Toyota they want to sell to you? Are there many other sellers of second-hand Toyotas? Most importantly, is the price set by the overall market equilibrium, or can you influence it?

You will probably be able to bring down the price even if it’s just by £100. That means that you can influence the price. And the seller isn’t likely to disclose all the accidents they might have engaged in, but you still end up buying their car.

Imperfect Market Example Picture of a Toyota car StudySmarterA second-hand Toyota Highlander, Wikimedia Commons.

In this case, you just participated in an imperfect market. This explanation will help you understand everything you need to know about imperfect markets.

Characteristics of imperfect markets

You can think of an imperfect market as any market that does not meet the functions and characteristics of perfectly competitive markets. If a market doesn’t have the underlying theoretical conditions of a perfectly competitive market, then it is an imperfect market.

It’s almost impossible to find perfectly competitive markets in the real world as it is extremely difficult to meet all the conditions of such a market. Therefore, imperfect markets are quite common in the real world, and you can find them in many places.

An imperfect market contains buyers and sellers who can influence not just the price but also the production of goods and services. Additionally, those in an imperfect market don’t fully disclose all the information about their goods and services. It is quite difficult for other firms to join or exit these markets, therefore limiting the number of buyers and sellers.

In contrast, a perfect market contains infinitely many buyers and sellers, and none of those can influence the price— as the market equilibrium sets it.

Most people would think that trading in the stock market is close to participating in a perfectly competitive market as the price constantly moves depending on the demand and supply for an asset. However, the stock market is, to a great extent, imperfect. That is because there’s imperfect information about the assets as companies don’t share all the information with the public.

Imperfect Market Example: Stock Market picture of charts in different devices StudySmarterStock market charts, Pixabay.

Differences between perfect and imperfect market in economics

To understand the differences between perfect and imperfect markets in economics, you need to start by understanding the underlying characteristics of a perfectly competitive market.

A perfectly competitive market has:

  • Infinitely many buyers and sellers.

  • No barriers to entering or leaving the market.

  • Their products are either identical or can be substituted.

  • None of the market participants can influence the price.

  • Perfect information about the goods and services.

These markets are hardly found in the real world as markets can’t meet all these characteristics. However, they do provide a useful way of understanding economics and the reasoning behind prices and market behaviours.

To learn more about the benchmark for the perfect market check our explanation on Perfect Competition.

Imperfect Market Example: A produce market is closest to perfect competition StudySmarterAgricultural produce market, Pixabay.

Agricultural produce markets are probably the closest to perfect competition markets in the real world.

In the real world, goods and services are heterogeneous instead of homogeneous. Sellers always try to differentiate their products from others to gain market dominance. Not all the information about the products is presented to the buyer, and often the market participants influence the prices. This is what makes an imperfect market.

The easiest way to determine an imperfect market is by simply finding a characteristic of a perfect market that isn’t met.

Types of imperfect markets

There are different market structures in which the price or production can be influenced in different ways. Let)s see some of the most common types of imperfect markets.

Monopoly

In this type of imperfect market, we only have one dominant seller that can influence the price of goods or services they produce. This influence enables the dominant seller to do so because there is no substitute for their products, so buyers are left without many choices.

For example, in the UK, a company is considered to have monopoly power if its market share is higher than 25%.

Google has over 90% of search engine traffic and can be considered a monopoly in the UK.

To learn more about this market structure check our explanation on Monopoly.

Oligopoly

In this market structure, there is a small number of firms with a very high market share. These firms can influence the price of their goods and services and provide huge barriers for new firms to enter the market.

Airbus and Boeing are good examples of oligopoly market structures. In this type of market, you have these two companies producing almost half of the world’s commercial aircraft.

To learn more about this market structure check our explanation on Oligopoly.

Monopolistic competition

Monopolistically competitive markets are types of imperfect markets that have many sellers that offer products for which there are no substitute and their products are not identical. All of these businesses compete with each other solely based on the differentiation of their product from others.

To learn more about this market structure check our explanation on Monopolistic Competition.

Monopsonies and oligopsonies

Monopsonies and oligopsonies are somewhat different from monopoly and oligopoly. The main difference is that in their case, instead of having many buyers, they have many sellers but few buyers, which then influences their prices.

There are many tobacco sellers in the world, but there are only a few large companies that produce cigarettes. These few companies are the buyers who buy from many tobacco sellers in the world. They can easily negotiate and bring down the prices.

Disadvantages of imperfect markets

Markets can become too concentrated or prices fail to keep pace with changes in the marketplace. In both ways, consumers end up being harmed. Therefore, an imperfect market can get quite harmful to an economy.

Some of the main disadvantages of imperfect markets are:

  • Some new businesses might come up with innovative ideas that help society in general, but it may be too hard to implement them if they were to enter an imperfect market— usually, these markets have tough entry barriers. They could also find it hard to establish themselves as a brand due to the harsh competition.

  • As in many types of imperfect markets, there is little competition. There are not many incentives for companies to keep developing and coming up with innovative products that would significantly benefit consumers.

  • Governments often interfere in cases where there are imperfect markets that significantly harm consumer welfare. They do so by providing new regulations to the markets through fiscal policy or monetary policy. One of the most common types of regulation includes antitrust laws. However, government intervention is not always the best remedy to imperfect markets. This is because government policy could also be flawed. Government actors may not have the right information at hand to intervene correctly.

To learn more check our explanation on Government Intervention in Markets.

Advantages of imperfect markets

Although imperfect markets can harm consumers and economic welfare in general, they also have some benefits.

The benefits of imperfect markets include the incentive firms have to come up with product differentiation to be able to attract as many customers as possible and to influence the prices. Imagine how boring it would be if we lived in a perfect market and everyone carried around identical products.

These new products that companies look for are often innovative and fill up huge market gaps. Would it not be preferable to live in an economy where companies are looking for better ways of doing their business so they can acquire new customers?

Imperfect Market - Key takeaways

  • If a market doesn’t have the underlying theoretical conditions of a perfectly competitive market, then it is an imperfect market.
  • It’s almost impossible to find perfectly competitive markets in the real world as it is extremely difficult to meet all the conditions of such a market.
  • An imperfect market contains buyers and sellers who can influence not just the price but also the production of goods and services.
  • Sellers in an imperfect market don’t fully disclose all the information about their goods and services.
  • It is quite difficult for other firms to join or exit these markets, therefore limiting the number of buyers and sellers.
  • The types of imperfect markets include monopoly, oligopoly, monopolistic competition, monopsony and oligopsony.

  • The benefits of imperfect markets include the incentive firms have to come up with product differentiation.

Imperfect Market

Going to buy a second-hand Toyota and being able to bring the price down through negotiations.

Imperfect markets violate at least one of the characteristics of perfectly competitive markets. These are:


  • Infinitely many buyers and sellers.
  • There are no barriers to entering or leaving the market.
  • Their products are either identical or can be substituted
  • None of the market participants can influence the price.
  • Perfect information about the goods and services.

Monopoly, Oligopoly, Monopolistic competition.

It means that at least one of the market’s key characteristics is different to perfect competition.

Heterogeneous products, limited number of buyers and sellers, barriers to entry or exit, market participants can influence prices, imperfect information about the goods and services.

Final Imperfect Market Quiz

Question

What is an example of an imperfect market?

Show answer

Answer

Going to buy a second-hand Toyota and being able to bring the price down through negotiations.

Show question

Question

What is the difference between perfect and imperfect competition market?

Show answer

Answer

Imperfect markets violate at least one of the characteristics of perfectly competitive markets. These are:


  • Infinitely many buyers and sellers.
  • There are no barriers to entering or leaving the market.
  • Their products are either identical or can be substituted.
  • None of the market participants can influence the price.
  • Perfect information about the goods and services.

Show question

Question

What are the three types of imperfect competition?


Show answer

Answer

Monopoly, Oligopoly, Monopolistic competition. 

Show question

Question

Do sellers in an imperfect market disclose all the information about the product?

Show answer

Answer

No. Neither buyers or sellers disclose full information about their products. 

Show question

Question

Mention the characteristics of a perfectly competitive market.

Show answer

Answer

  • Infinitely many buyers and sellers.
  • There are no barriers to entering or leaving the market.
  • Their products are either identical or can be substituted.
  • None of the market participants can influence the price.
  • Perfect information about the goods and services.

Show question

Question

Which is more likely to happen in the real world: a perfectly competitive market or an imperfect market?

Show answer

Answer

Imperfect market is more likely

Show question

Question

Why are imperfect markets easier to find in the real world?

Show answer

Answer

Because there are many cases where the prices are influenced by those participating in the market.

Show question

Question

Explain monopoly.

Show answer

Answer

In this type of imperfect market, we have only one dominant seller capable of influencing the price of goods or services they produce. 

Show question

Question

Explain oligopoly.

Show answer

Answer

In such a market structure, there are a small number of firms with a very high market share. These firms can influence the price of their goods and services and provide huge barriers for new firms to enter the market.

Show question

Question

Give an example of an oligopoly.

Show answer

Answer

Airbus and Boeing are good examples of oligopoly market structures. In this type of market, you have these two companies producing almost half of the world’s commercial aircraft.

Show question

Question

What are monopolistically competitive markets?

Show answer

Answer

Monopolistically competitive markets are types of imperfect markets that have many sellers that offer products for which there are no substitute and their products are not identical.

Show question

Question

What are monopsonies and oligopsonies?

Show answer

Answer

Monopsonies and oligopsonies are also included in the types of an imperfect market. They are somewhat different from monopoly and oligopoly.

Show question

Question

Give an example of monopsonies.

Show answer

Answer

There are many tobacco sellers in the world, but there are only a few large companies that produce cigarettes.

Show question

Question

What are some of the disadvantages of imperfect markets?

Show answer

Answer

Markets can become too concentrated, or prices fail to keep pace with changes in the marketplace— in both ways, consumers end up being harmed. Therefore, an imperfect market can get quite harmful to an economy. 

Show question

Question

What are some of the benefits of imperfect markets?

Show answer

Answer

The incentive firms have to come up with product differentiation to be able to attract as many customers as possible and be able to influence the price.

Show question

Question

Why does Apple keeps trying to be innovative?

Show answer

Answer

To differentiate its products from competitors.

Show question

60%

of the users don't pass the Imperfect Market quiz! Will you pass the quiz?

Start Quiz

Discover the right content for your subjects

No need to cheat if you have everything you need to succeed! Packed into one app!

Study Plan

Be perfectly prepared on time with an individual plan.

Quizzes

Test your knowledge with gamified quizzes.

Flashcards

Create and find flashcards in record time.

Notes

Create beautiful notes faster than ever before.

Study Sets

Have all your study materials in one place.

Documents

Upload unlimited documents and save them online.

Study Analytics

Identify your study strength and weaknesses.

Weekly Goals

Set individual study goals and earn points reaching them.

Smart Reminders

Stop procrastinating with our study reminders.

Rewards

Earn points, unlock badges and level up while studying.

Magic Marker

Create flashcards in notes completely automatically.

Smart Formatting

Create the most beautiful study materials using our templates.

Sign up to highlight and take notes. It’s 100% free.