Imperfect Market – What it is, definition and concept

The imperfect market is a market in which the conditions of perfect competition are not met. This implies that both individual suppliers and demanders could have influence to control production and set prices in the market.

That is, an imperfect market is one where the assumptions of perfect competition are not met, such as a large number of buyers and sellers who are price-acceptors (they cannot influence the price).

In addition, other assumptions that are not present in imperfect markets are, for example, that agents have all the information they need (perfect information), or the absence of barriers to entry or exit from the market, among others. All these conditions are fulfilled in perfect competition.

It is important to clarify that, in reality, the competitive situation is not perfect. Thus, perfect competition only occurs theoretically, but not in practice. For this reason, we can say that all markets are imperfect.

Undoubtedly, the imperfect market can arise when on the demand side a buyer or few buyers have the capacity to demand all or a large volume of the production of a market. Likewise, on the supply side, it occurs when one, two or a few companies concentrate the production of the entire market.

In either case, whether on the demand or supply side, market imperfection occurs. This, when a few buyers or sellers control production and set prices. In addition, in the imperfect market, information is limited and there are barriers to entry and exit to the market.

Characteristics of the imperfect market

An imperfect market has the following characteristics:

  • The number of suppliers and demanders that make up the market is small. It can be one, two or a few companies that participate in the market. These companies can occupy the role of buyers or sellers in the market.
  • Market participants can influence pricing and control of the level of production.
  • There may be controls in the market that prevent the free mobility of products and factors of production.
  • There are barriers to entry and exit to the markets. Therefore, very few companies can enter to compete, either due to high production costs, the advantage of differentiation or the high investments that are needed to compete.
  • All information is controlled or not disclosed. Market information is incomplete, sellers often have more information than buyers. For this reason, information is handled asymmetrically.
  • The products are highly differentiated. Consumers consider these products to be different in terms of design, functionality, quality or utility.
  • Product prices tend to be high and production levels low and controlled. This, in the case of monopolies, duopolies and oligopolies.
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Effects of the imperfect market functioning

Among the main effects that can be caused in the economy by the functioning of imperfect markets we find:

  • The imperfect market allows prices to be established well above the marginal costs that the suppliers have in their production process (When the market is imperfect on the supply side).
  • Market forces such as supply and demand cannot act freely and efficiently within the market.
  • Competitive market prices are lost.
  • Government interventions can be generated, seeking to correct the failures produced by the market.

Types of imperfect market structures

Of course, imperfect market structures can occur on the supply side and on the demand side. Thus, imperfect markets occur when market forces do not operate freely.

Imperfect Market 1 1
Imperfect market
On the supply side

1. Imperfect markets on the supply side

Among them we find the imperfect markets of:

to. Monopoly

To begin with, the monopoly market occurs when the production of a good or service is concentrated in a single company. This company will have a lot of market power and will be able to have control over the pricing, level and quality of production.

b. Duopoly

Whereas, the duopoly implies that there are only two competing companies in the market that assume control of the market, equally influencing production and price.

c. Oligopoly

Similarly, the oligopoly is an imperfect type of market that is dominated by a small number of firms that produce and offer a product. This allows them to greatly influence the price, since in this market there are many demanders or consumers. In the oligopoly, sellers can act in collusion.

Imperfect Market 2
Imperfect market
On the demand side

2. Imperfect markets on the demand side

Among them we find the imperfect markets of:

to. Monopsony in the imperfect market

On the other hand, the monopsony market is made up of a single buyer and many bidders. This causes the demanding company to acquire control over the price and the level of production in the market.

b. Oligopsony in the imperfect market

Finally, oligopsony is another imperfect market where we find a small group of buyer companies. These companies take control of prices and the level of production in a given market.

In conclusion, it can be said that the functioning of the imperfect market can occur when supply or demand does not operate efficiently. Therefore, there are few suppliers or demanders who come to have control of the markets. This control occurs especially when the supply of goods and services is highly differentiated. Likewise, when there is no substitute products. The absence of sufficient competition in demand or supply allows for a lot of market power and control over the price and quality of the product.

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