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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.

Imperfect Market

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 FinancingCan 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 …


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