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Imperfect Market

Definition

In economics, specifically general equilibrium theory, a perfect market is defined by several idealizing conditions, collectively called perfect competition. In theoretical models where conditions of perfect competition hold, it has been theoretically demonstrated that a market will reach an equilibrium in which the quantity supplied for every product or service, including labor, equals the quantity demanded at the current price. This equilibrium will be a Pareto optimum, meaning that nobody can be made better off by exchange without making someone else worse off.

What is an 'Imperfect Market'

An imperfect market refers to any economic market that does not meet the rigorous standards of a hypothetical perfectly (or "purely") competitive market, as established by Marshellian partial equilibrium models. An imperfect market arises whenever individual buyers and sellers can influence prices and production, or otherwise when perfect information is not known to all market actors.

Explaining 'Imperfect Market'

All real-world markets are theoretically imperfect, and the study of real markets is always complicated by various imperfections. For example, traders in a financial market do not possess perfect or even identical knowledge about financial products. The traders and assets in a financial market are not perfectly homogeneous. New information is not instantaneously transmitted to all actors, and there does not exist an infinite velocity of reactions thereafter. Economists only use perfect competition models to think through the implications of economic activity.

Perfect Markets Can Never Exist

No serious economists believe that a perfectly competitive market could ever arise, and very few consider such a market desirable. No market can ever have an unlimited number of buyers and sellers. Economic goods in every market are heterogeneous, not homogeneous, as long as more than one producer exists. Diversity of goods and diversity of tastes are preferable aspects of imperfect markets.

Implications of Imperfect Markets

Not all market imperfections are harmless or natural. Situations can arise in which too few sellers control too much of a single market, or when prices fail to adequately adjust to material changes in market conditions. It is from these instances that the majority of economic debate originates.

Imperfect Market FAQ

What are the examples of imperfect market?

Monopoly, oligopoly, monopolistic competition, as well as monopsony and oligopsony are all examples of imperfect markets.

What are the two types of imperfectly competitive markets?

Monopolistic competition occurs when there are many firms that offer products that are similar, yet different. In an oligopoly, there are only a few firms that do not influence the significance of the others.

What is monopolistic competition market?

Monopolistic competition describes a market in which there are many firms that offer products that are similar, yet different. There are many competitors, each company sets its own prices, and products are unique/differentiated.

What are the 4 characteristics of oligopoly?

Characteristics of an oligopoly include few sellers, a high barrier to entry, interdependence, and prevalent advertising. An oligopoly has few sellers that control most of the sales in the industry. There is a high barrier to industry, so it is difficult for a new company start-up to break into the industry and compete. There is interdependence among companies, so if one company makes a change, such as lowering prices, the other companies are affected. Within an oligopoly, there is prevalent advertising, typically on a national scale.

What is an example of imperfect competition?

Monopoly, oligopoly, monopolistic competition, as well as monopsony and oligopsony are all examples of imperfect markets.

What are the types of imperfect competition?

Monopoly, oligopoly, monopolistic competition, as well as monopsony and oligopsony are all examples of imperfect markets.

Further Reading


Can HMOs Wield Market Power--Assessing Antitrust Liability in the Imperfect Market for Health Care Financing
heinonline.org [PDF]
… 336, 345 (1993) (citing HERBERT HOVENKAMP, Economics and Federal Antitrust Law 1-2 … Supreme Court precedent for assessing antitrust liability in sophisticated but imperfect markets, threatens to increase the ease with which HMOs can obtain market power, thereby …

International capital mobility and crowding out in the US economy: imperfect integration of financial markets or of goods markets?International capital mobility and crowding out in the US economy: imperfect integration of financial markets or of goods markets?
www.nber.org [PDF]
… 336, 345 (1993) (citing HERBERT HOVENKAMP, Economics and Federal Antitrust Law 1-2 … Supreme Court precedent for assessing antitrust liability in sophisticated but imperfect markets, threatens to increase the ease with which HMOs can obtain market power, thereby …

Price stability with imperfect financial integrationPrice stability with imperfect financial integration
onlinelibrary.wiley.com [PDF]
… 336, 345 (1993) (citing HERBERT HOVENKAMP, Economics and Federal Antitrust Law 1-2 … Supreme Court precedent for assessing antitrust liability in sophisticated but imperfect markets, threatens to increase the ease with which HMOs can obtain market power, thereby …

The CAPM and Beta in an Imperfect MarketThe CAPM and Beta in an Imperfect Market
papers.ssrn.com [PDF]
… 336, 345 (1993) (citing HERBERT HOVENKAMP, Economics and Federal Antitrust Law 1-2 … Supreme Court precedent for assessing antitrust liability in sophisticated but imperfect markets, threatens to increase the ease with which HMOs can obtain market power, thereby …

Financial market integration and macroeconomic volatilityFinancial market integration and macroeconomic volatility
www.jstor.org [PDF]
… 336, 345 (1993) (citing HERBERT HOVENKAMP, Economics and Federal Antitrust Law 1-2 … Supreme Court precedent for assessing antitrust liability in sophisticated but imperfect markets, threatens to increase the ease with which HMOs can obtain market power, thereby …

Equilibrium in an Imperfect Market: A Constraint on the Number of Securities in the PortfolioEquilibrium in an Imperfect Market: A Constraint on the Number of Securities in the Portfolio
www.jstor.org [PDF]
… 336, 345 (1993) (citing HERBERT HOVENKAMP, Economics and Federal Antitrust Law 1-2 … Supreme Court precedent for assessing antitrust liability in sophisticated but imperfect markets, threatens to increase the ease with which HMOs can obtain market power, thereby …

Exchange rates and foreign direct investment: an imperfect capital markets approachExchange rates and foreign direct investment: an imperfect capital markets approach
academic.oup.com [PDF]
… 336, 345 (1993) (citing HERBERT HOVENKAMP, Economics and Federal Antitrust Law 1-2 … Supreme Court precedent for assessing antitrust liability in sophisticated but imperfect markets, threatens to increase the ease with which HMOs can obtain market power, thereby …

Saving behaviour under imperfect financial markets and the current account consequencesSaving behaviour under imperfect financial markets and the current account consequences
academic.oup.com [PDF]
… 336, 345 (1993) (citing HERBERT HOVENKAMP, Economics and Federal Antitrust Law 1-2 … Supreme Court precedent for assessing antitrust liability in sophisticated but imperfect markets, threatens to increase the ease with which HMOs can obtain market power, thereby …

On the positive role of financial intermediation in allocation of venture capital in a market with imperfect informationOn the positive role of financial intermediation in allocation of venture capital in a market with imperfect information
onlinelibrary.wiley.com [PDF]
… 336, 345 (1993) (citing HERBERT HOVENKAMP, Economics and Federal Antitrust Law 1-2 … Supreme Court precedent for assessing antitrust liability in sophisticated but imperfect markets, threatens to increase the ease with which HMOs can obtain market power, thereby …

Stochastic dominance with a riskless asset: An imperfect marketStochastic dominance with a riskless asset: An imperfect market
www.jstor.org [PDF]
… 336, 345 (1993) (citing HERBERT HOVENKAMP, Economics and Federal Antitrust Law 1-2 … Supreme Court precedent for assessing antitrust liability in sophisticated but imperfect markets, threatens to increase the ease with which HMOs can obtain market power, thereby …



Q&A About Imperfect Market


Why are diversity of goods and diversity of tastes preferable aspects of imperfect markets?

Diversity in goods allows consumers to choose what they want, while diversity in tastes allows them to choose what they like.

When do prices fail to adequately adjust to material changes in the conditions of the economy?

Prices fail to adequately adjust when there are material changes in conditions within the economy. This leads to inefficient allocation or distribution of resources, which may lead to shortages or surpluses depending on whether demand exceeds supply or vice versa. A shortage occurs when demand exceeds supply; this results in higher prices as suppliers compete for limited supplies (see Law Of Demand). A surplus occurs when supply exceeds demand; this results in lower prices as suppliers compete for excess supplies (see Law Of Supply). Both situations result from price failing to adequately adjust due to lack information about changing conditions within the economy."

What is perfect competition?

Perfect competition occurs when there are many buyers and sellers in an industry who have no control over price. This is also known as pure competition because it has all the characteristics of perfect competition except for one-the lack of barriers to entry into the industry.

What is an imperfect market?

An imperfect market is any economic market that does not meet the rigorous standards of a hypothetical perfectly competitive market.

How do you categorize markets into different structures?

Markets can be categorized based on the number of sellers, type of goods sold, and degree of competition among sellers.

Why would a perfectly competitive firm not want to enter a new market if it was already profitable in its existing markets?

A perfectly competitive firm would not want to enter a new market if it was already profitable in its existing markets because this would make them less efficient than other firms who were operating at lower levels of production due to excess capacity.

What does imperfectly competitive mean?

Imperfectly competitive means that there are some monopolistic competitors, monopolists, oligopolists, or duopolists in a market.

When can too few sellers control too much of one single market occur?

Situations can arise when too few sellers control too much of one single market. This is harmful because it limits consumer choice and competition.

What is market structure?

Market structure refers to the way firms are differentiated and categorized based on types of goods they sell (homogeneous, heterogeneous) and how their operations are affected by external factors and elements.

Is a perfectly competitive market ever desirable?

No serious economists believe that a perfectly competitive market could ever arise, and very few consider such a market desirable.

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