What Does an Imperfect Market Look Like?

Any economic market that doesn’t meet the strict requirements of the made-up “perfectly” or “purely” competitive market is called an “imperfect market.” If several conditions are met, there is “perfect competition,” an ideal market system. In the real world, no market works like the perfect competition model, so all of them are imperfect.

Individual buyers and sellers can change prices and production in an imperfect market. Information about goods and prices is not fully shared, and entering or leaving the market is challenging.

There can be infinite buyers and sellers in a perfect market, and there is perfect competition.

How to Understand Imperfect Markets

In the real world, every market isn’t perfect. There are different goods and services, prices set by price makers instead of supply and demand, imperfect or incomplete information about goods and prices, small buyers and sellers, and competition for market share. These are all things that affect the study of fundamental markets.

For example, stock market traders don’t know the exact amount or anything about financial goods. The traders and investments are not all the same in a financial market. New information doesn’t get sent immediately, and responses can only happen quickly.

Economists only use perfect competition models to think about what economic action means. Because of this, the word “imperfect market” isn’t quite right. Most people will think that a market that isn’t perfect is profoundly broken or wrong. But this doesn’t always happen. Any market flaw can be found in the real world, and different markets work better or worse depending on the flaw.

What Happens When Markets Aren’t Perfect?

Not all flaws in the market are safe or regular. There are times when too few buyers control too much of a single market or when prices don’t change enough to reflect significant changes in the market. Most of the economic argument starts with these kinds of situations.

Some economists say that any change from models of perfect competition is reason enough for the government to get involved to make production or transport more efficient. This kind of interference could come in the form of monetary policy, fiscal policy, or rules for the market. Antitrust law is a typical example of this kind of interventionism because it is based on the theory of perfect competition.

To help keep so-called “perfect markets” in check, governments can also use taxes, caps, licenses, and tariffs.

Some experts say the government might not always need to get involved to fix markets that aren’t working right. This is because government policy isn’t perfect either, and people who work for the government might not have the proper knowledge or incentives to get involved in the right way. Finally, many experts say that the government should not get involved in markets very often, if ever. Many problems in the market are seen as the fault of wrong government interference by the Austrian and Chicago schools.

Different Kinds of Bad Markets

If at least one of the conditions for a perfect market is not met, the market may not be perfect. There are flaws in every business in some way. The following designs show imperfect competition:

Playing Monopoly

In this set-up, there is only one seller, who is called the dominant supplier. There are no alternatives to the products this company sells. There is only one seller in these markets, and that one seller sets the prices of things and services. People can’t be told when prices change.

Three-way tie

This building has a lot of buyers but not many owners. These few companies may make it hard for others to enter the market. There are two types of price sets: everyone agrees on the price, one person sets the price, and the others follow.

Competition Between Monopolies

In unfair competition, many sellers offer goods that are very similar and can’t be switched out. Businesses set prices and fight each other, but what one decides does not affect the other.

How Monopsony and Oligopsony Work

There are a lot of sellers in these buildings, but not many buyers. All three times, the buyer changes prices on the market by pitting companies against each other.

Ideal Markets vs. Imperfect Markets

The following things are signs of a perfect market:

• There are a considerable number of buyers and sellers.
• Goods that are the same or can be switched out.
• There are no hurdles to getting in or out.
• Buyers know everything they need to know about the goods and prices.
• Companies can’t set their prices because they are price-takers.

There can never be too many buyers and sellers in a market. As long as there is more than one producer, economic things in every market are not all the same. They are heterogeneous. In a market that isn’t perfect, people want a wide range of things and tastes.

It is not possible to have a perfect market, but thinking about them is helpful because they help us understand how prices and economic forces work. However, trying to apply the rules of perfect competition to real life is not a good idea. There are logical problems from the start, especially since only a competitive industry could ever reach a state of equilibrium in any other situation. So, perfect competition is only theoretically possible; it can never be reached in real life.

Conclusion

• Imperfect markets can’t meet the strict requirements of a perfectly made-up or purely competitive market.
• Markets that aren’t perfect have a lot of competition for market share, many hurdles to entry and exit, many different goods and services, and not many buyers and sellers.
• In the real world, there are no such things as perfect markets. Every market is flawed.
• Monopolies, oligopolies, monopolistic competition, and monopsonies are all imperfect market arrangements.