perfect and imperfect market essay

Perfect Markets in General Essay

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Perfect market is a situational market that is rare in real life (Rittenberg & Tregarthen, 2011). Perfect competition in the market occurs in a way that it is difficult for any stakeholder to influence the price of commodities. In this case, automobile, beer and corn markets are examples of perfect market models.

A perfect competition market is, therefore, an imaginary situation that is characterized by large number of buyers and sellers. The buyers and sellers are many, but their individual consumer behavior has no impact on the market (Rittenberg & Tregarthen, 2011).

Similarly, the demand of one buyer is so insignificant compared to the total demand in the market and, therefore, no individual behavior can influence the prices. There are few competitive perfect markets in existence where the conditions of the perfect market are strict. (Salemi, & Hansen, 2005, p.29)

In this case, the automobile, beer and corn industries have influenced the buyer selection in their products so that products can be bought at different prices. A good example of perfect competitive market is where many farmers are producing corn.

Moreover, in the automobile industry, many dealers sell similar models of cars that one can barely differentiate. “The firms in these markets are price takers and are characterized by perfect knowledge, freedom of entry and exit of the market” (Salemi, & Hansen, 2005, p.29). There is also non-governmental interference in their activities, lack of excess supply and demand, and less transport costs.

In the beer and automobile industries, the seller has perfect knowledge about the market. Therefore, no one would conduct business at their preferred price other than the equilibrium price. For example, today a person could be assembling cars and then he or she can decide to clear the stock and start something else.

In these market models, all buyers are identical in the eyes of sellers. There are also no advantages of selling products to particular buyers (Salemi, & Hansen, 2005). The beer and the automobile companies have no personal recognition or preference of their buyers.

The prices in these markets are determined strictly by the interplay demand and supply. There is no government intervention in the form of taxes or subsidies, quotas, price controls among other regulations (Salemi, & Hansen, 2005). This factor makes the automobile and beer industries sell all what they supply in the market.

The buyers are able to buy all what they require because there is no deficit in supply. The other conditions that place these products under perfect mobility are factors of production. All factors of production including land, capital, labor, and entrepreneurship can be easily switched from one use to another. In beer, automobile, and corn market, factors of production are assumed to be perfectly mobile.

Further, it is assumed that buyers and sellers are located in one area. As such, they do not incur any costs in transporting their goods. The sellers in these markets cannot, therefore, charge higher prices to cover the cost of transport.

In the perfect markets, the buyers have perfect knowledge of the prices offered by different firms on certain products. The products sold have homogeneity. Perfect competition is advantageous to the society because the price equals the marginal cost of production in each firm. The price offered is reasonable and no single firm monopolizes the market.

Rittenberg, L., & Tregarthen, T. (2011). Principles of economics . Irvington, NY: Flat World Knowledge.

Salemi, M. K., & Hansen, W. L. (2005). Discussing economics: A classroom guide to preparing discussion questions and leading discussion . Cheltenham: Edward Elgar.

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What Are Imperfect Markets? Definition, Types, and Consequences

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What Is an Imperfect Market?

An imperfect market refers to any economic market that does not meet the rigorous standards of the hypothetical perfectly—or purely—competitive market. Pure or perfect competition is an abstract, theoretical market structure in which a series of criteria are met. Since all real markets exist outside of the spectrum of the perfect competition model, all real markets can be classified as imperfect markets.

In an imperfect market , individual buyers and sellers can influence prices and production, there is no full disclosure of information about products and prices, and there are high barriers to entry or exit in the market.

A perfect market is characterized by perfect competition, market equilibrium, and an unlimited number of buyers and sellers.

Key Takeaways

• Imperfect markets do not meet the rigorous standards of a hypothetical perfectly or purely competitive market.
• Imperfect markets are characterized by having competition for market share, high barriers to entry and exit, different products and services, and a small number of buyers and sellers.
• Perfect markets are theoretical and cannot exist in the real world; all real-world markets are imperfect markets.
• Market structures that are categorized as imperfect include monopolies, oligopolies, monopolistic competition, monopsonies, and oligopsonies.

Understanding Imperfect Markets

All real-world markets are imperfect. Thus, the study of real markets is always influenced by competition for market share, high barriers to entry and exit, different products and services, prices set by price makers rather than by supply and demand, imperfect or incomplete information about products and prices, and a small number of buyers and sellers.

For example, traders in the 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, and there is a limited velocity of reactions.

When considering the implication of economic activity, economists only use perfect competition models. A such, the term imperfect market is somewhat misleading. Most people will assume an imperfect market is deeply flawed or undesirable. However, this is not always the case. The range of market imperfections is as wide as the range of all real-world markets—some are much or less efficient than others.

Consequences 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.

Some economists argue that any deviation from perfect competition models justifies government intervention, in order to promote increased efficiency in production or distribution. Such interventions may come in the form of monetary policy , fiscal policy, or market regulation. One common example of such interventionism is anti-trust law, which is explicitly derived from perfect competition theory.

Governments may also use taxation, quotas, licenses, and tariffs to help regulate so-called perfect markets.

Other economists argue that government intervention may not always be necessary to correct imperfect markets. This is because government policy is also imperfect, and government actors may not possess the right incentives or information to interfere correctly. Finally, many economists argue government intervention is rarely, if ever, justified in markets. The Austrian and Chicago schools notably blame many market imperfections on erroneous government intervention.

Types of Imperfect Markets

When at least one condition of a perfect market is not met, it can lead to an imperfect market. Every industry has some form of imperfection. Imperfect competition can be found in the following structures:

This is a structure in which there is only one (dominant) seller. Products offered by this entity have no substitutes. These markets have high barriers to entry and a single seller who sets the prices on goods and services. Prices can change without notice to consumers.

This structure has many buyers but few sellers. These few players in the market may bar others from entering. They may set prices together or, in the case of a cartel, only one takes the lead to determine the price for goods and services while the others follow.

Monopolistic Competition

In monopolistic competition, there are many sellers who offer similar products that can't be substituted. Businesses compete with one another and are price makers, but their individual decisions do not affect the other.

Monopsony and Oligopsony

These structures have many sellers, but few buyers. In both cases, the buyer is the one who manipulates market prices by playing firms against one another.

Imperfect Markets vs. Perfect Markets

Perfect markets are characterized by having the following:

• An unlimited number of buyers and sellers.
• Identical or substitutable products.
• No barriers to entry or exit.
• Buyers have complete information on products and prices.
• Companies are price takers meaning have no power to set prices.

In reality, 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. A diverse range of goods and tastes are preferred in an imperfect market.

Perfect markets, though impossible to achieve, are useful because they help us think through the logic of prices and economic incentives. It is a mistake, however, to try extrapolating the rules of perfect competition into a real-world scenario. Logical problems arise from the start, especially the fact that it is impossible for any purely competitive industry to conceivably attain a state of equilibrium from any other position. Perfect competition can thus only be theoretically assumed—it can never be dynamically reached.

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Video transcript

Perfectly and Imperfectly Competitive Markets

Cite this chapter.

• John Roberts  

Part of the book series: The New Palgrave ((NPA))

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In the competition between economic models, the theory of perfect competition holds a dominant market share: no set of ideas is so widely and successfully used by economists as is the logic of perfectly competitive markets. Correspondingly, all other market models (collectively labelled ‘imperfectly competitive’ and including monopoly, monopolistic competition, dominant-firm price leadership, bilateral monopoly and other situations of bargaining, and all the varieties of oligopoly theory) are little more than fringe competitors.

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© 1989 Palgrave Macmillan, a division of Macmillan Publishers Limited

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Roberts, J. (1989). Perfectly and Imperfectly Competitive Markets. In: Eatwell, J., Milgate, M., Newman, P. (eds) Allocation, Information and Markets. The New Palgrave. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-20215-7_24

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• Key Differences

Know the Differences & Comparisons

Difference Between Perfect Competition and Imperfect Competition

The type of market structure decides the market share of a firm in the market. If there exists a single firm, it will serve the entire market, and the demand of the customers are satisfied with that firm only. But if we increase the number of firms to two, the market will also be shared by the two. Similarly, if there are about 100 small firms in the market, the market is shared by all of them in proportion.

Therefore, it is the market structure, which affects the market. So here we are going to describe the differences between perfect competition and imperfect competition, in economics.

Content: Perfect Competition Vs Imperfect Competition

Comparison chart, definition of perfect competition.

Perfect Competition is an economic structure where the degree of competition between the firm is at its peak. Given are the salient features of the perfect competition:

• Many buyers and sellers.
• Product offered is identical in all respects.
• Any firm can come and go, as per its own discretion.
• Both the parties to the transaction are having complete knowledge about the product, quantity, price, market and market conditions as well.
• Transportation and Advertising cost is nil.
• Free from government interference.
• The price for a product is uniform across the market. It decided by the demand and supply forces; no firm can affect the prices, that’s why the firms are price takers.
• Each firm earns a normal profit.

Example : Suppose you go to a vegetable market to buy tomatoes. There are many tomato vendors and buyers. You go to a vendor and inquire about the cost of 1 kg tomatoes, the vendor replies, it will cost Rs. 10. Then you go ahead and inquire some more vendors. The prices of all the vendors are same for the demanded quantity. This is an example of perfect competition.

Definition of Imperfect Competition

The competition, which does not satisfy one or the other condition, attached to the perfect competition is imperfect competition. Under this type of competition, the firms can easily influence the price of a product in the market and reap surplus profits.

In the real world, it is hard to find perfect competition in any industry, but there are so many industries like telecommunications, automobiles, soaps, cosmetics, detergents, cold drinks and technology, where you can find imperfect competition . By the virtue of this, imperfect competition is also considered as real world competition.

There are various forms of imperfect competition, described below:

• Monopoly : Single seller dominates the entire market.
• Duopoly : Two sellers share the whole market.
• Oligopoly : Few sellers are there who either act in collusion or competition.
• Monopsony : Many sellers and a single buyer.
• Oligopsony : Many sellers and few buyers.
• Monopolistic Competition : Numerous sellers offering unique products.

Key Differences Between Perfect Competition and Imperfect Competition

The main points of difference between perfect competition and imperfect competition in economics are depicted below:

• The competitive market, in which there are a large number of buyers and sellers, and the sellers supply identical products to the buyers; it is known as perfect competition. Imperfect competition occurs when one or more conditions of the perfect competition are not met.
• Perfect competition is a hypothetical situation, which does not apply in the real world. Conversely, Imperfect Competition is a situation that is found in the present day world.
• When it comes to perfect competition, there are many players in the market, but in imperfect competition, there can be few to many players, depending upon the type of market structure.
• In perfect competition, the sellers produce or supply identical products. As against, in imperfect competition the products offered by the sellers can either be homogeneous or differentiated.
• If we talk about perfect competition, there are no barriers to the entry and exit of the firms which is just opposite in the case of imperfect competition.
• In perfect competition, it is assumed that the firms do not influence the price of a product. Hence they are price takers but in imperfect competition, the firms are price makers.

Perfect competition is an imaginary situation which does not exist in reality, but imperfect competition is factual i.e. which genuinely exist.

Whichever market, you consider for this like for example if you consider the detergent market. There are many players like Tide, Rin, Surf Excel, Ariel, Ghadi, etc. producing similar product i.e. detergent.

At first instance, you may think that this is an example of perfect competition, but this is not so. If you dig a little deeper, you may find that all the products are different as well as they vary in their prices. Some are low budget detergents for capturing the market of price sensitive people while others are high budget detergents for quality sensitive people.

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Characteristics Of Perfect And Imperfect Markets

Market is a place where the buyers and sellers make transactions regarding goods and services. Depending on time, competition and extent of area, markets are classified into several types. On the basis of competition markets are classified into perfect markets and imperfect markets.

Perfectly competitive Markets:

Perfectly competitive market is one which consists of large number of buyers and sellers, uniform price and homogeneous commodities. No single buyer or seller is able to exercise control over the price of a commodity. The price of a commodity is same throughout the market. The following are the characteristics of perfect markets or perfectly competitive markets.

Characteristics of perfect markets:

1) There exists a large number of buyers and sellers. Each buyer buys a main portion of the whole stock of commodities. Similarity each seller sells a negligible portion of the whole stock of commodities. They have no influence over the determination of the price.

2) There prevails homogeneous commodities. The quantity and quality of commodities available in the market are the same. No differences are observed in the size, quality, taste of the Commodities.

3) Both the buyers and sellers will know the prices prevalent in the market. Neither of them can increase or decrease the price of a commodity. So the price line of a perfectly competitive market runs parallel to OX axis.

4) There exists no obstacles for the firms to enter or leave the industry. New firms enter the industry when there are huge profits. Old firms leave the industry when there are huge losses.

5) There exists no transport costs. As a result the price of the commodity is same at any place in the market.

6) Factors of production are freely mobile. They move from one industry to the other until they get higher remunerative prices for their services.

Distinction between pure competition and perfect competition:

‘Pure’ competition is a word introduced by Prof. Chamberlain. Pure competition is said to prevail when there exists large number of buyers and sellers, homogeneous commodities and freedom of admission into and exit of firms from an industry. In addition to these features perfect competition includes perfect knowledge of prices, free mobility of factors of production, absence of transport costs and uniform price as its features.

Both pure and perfect competitions are the two ideal concepts which can’t be found in real world. What we observe in reality is the prevalence of imperfect competition.

Imperfect Competition:

Imperfect competition consists of the features which are opposite to perfect competition. It has some special features.

Characteristics of imperfect markets:

1) There exists a small number of sellers in ‘this market. This enables the sellers to charge the prices as they like.

2) The number of buyers is also small. But its does not mean that buyers are few. The buyers in this market system are divided into several groups. Each group buys goods and services from different sellers.

3) The commodities bought and sold in this market are heterogeneous. They differ in their size, quality, appearance, tastes and durability.

4) The sellers adopt product differentiation and price discrimination. They collect different prices for the same commodity from different buyers.

5) There exists transport costs and selling costs in this market.

6) The consumers may not know the prevailing prices of the commodities in the market.

7) The factors of production are not freely mobile.

8) There prevails different prices for the same commodity in the same region.

Thus, imperfect competition consists of the features which are quite opposite to the perfect competition.

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Understanding Perfect and Imperfect Competition

Alexandra L.

Checked : T. M. H. , Luis G.

Latest Update 20 Jan, 2024

12 min read

Table of content

Perfect competition

How does the perfect competition work, large, homogeneous markets, perfect information, no controls, transportation is cheap and efficient, example of a perfectly competitive market, do perfect competition models have disadvantages, imperfect competition.

Perfect competition is a thought of microeconomics that looks at a market system where market forces have a monopolistic control. As long as these forces are met, the market is said to be in perfect competition. But, there has been no market that clearly defines ideal competition. In the real world, getting forces that work in perfect control is not possible; hence, all markets are classified as imperfect. A perfect market is simply a standard that measures how practical and real-world markets operate.

In   microeconomics , the study of perfectly competitive and not perfectly competitive markets is paramount. The subject affects most of the aspects of a real market in the economy, including decision making, supply, demand, pricing, and many other variables as you may already know, microeconomics one of the two major branches of economics and deal with the study of decisions made by individuals and firms. We are all faced with choices in our daily life. When it comes to fulfilling personal needs, for instance, one must forego one thing to achieve the other. And as you will discover throughout this article, these decisions affect and are equally affected by the economy. We shall, therefore, be looking perfect and imperfect competition as principles of microeconomics.

Perfect competition is only theoretical. This means you will only read about a perfectly competitive market structure in books and texts, but you will never experience it in real life.

A market is said to be in perfect competition when:

• All the firms involved in the market sell an identical product. The product is said to be a ‘commodity’ or ‘homogeneous.’ Every player is aware of what they and others are giving to or getting from the market.
• The firms are price takers. Since they are selling the same product, they cannot influence the market price of their individual products.
• Market share does not influence the price. However, small or big a firm is, they share similar pricing with others. In any case, they are only price takers.
• Buyers have complete information. Perfect information means buyers already know the past, future, and present of the product being sold and what each firm is charging.
• There are entirely free resources for this information.
• There is no barrier to entry into or exit from the market.

In contrast to this, perfect competition is the imperfect competition where a market violates the abstract tenets of perfectly competitive environments. All markets exist beyond the boundaries of ideal competition; hence they are categorized as imperfect. The modern concept of imperfect vs. perfect competition comes from the Cambridge classical culture of post-classical economic thought.

As stated, completely perfect competition does not exist. However, markets like commodities, such as oil or wheat, are highly competitive and liquid. They are, therefore, the closes the world can get to perfectly competitive markets.

This market is considered an “ideal type” or a market that bears the comparison for real-market structures. Theoretically, perfect competition is the direct opposite of a monopoly. For the case of monopoly, there is only a single firm in charge of producing and supplying a product or service, and they can price it any way they want. The consumer has no alternative, and would-be competitors cannot enter the market.

In perfect competition, there is equilibrium between demand and supply. In other words, there are many buyers and sellers; hence the price is determined by these variables. Companies don’t reap much profit, but just enough to stay in business. Any attempt to gain excess profits will attract other firms in the market, driving profits even lower.

In a perfect competition setting, there is enough supply and demand. The sellers are mostly small companies, as opposed to large corporations that can control prices. The product has minimal differences in terms of capabilities, features, and prices. Hence, buyers cannot differentiate between the products by only looking at the physical appearance like size and color or intangible values like the brand. And because there is a large population of both buyers and suppliers, supply and demand remain fairly constant within the market. Also, a buyer has a chance to substitute specific products from one firm for another's easily.

People and firms make decide based on available information. And in this case, there is information about the ecosystem and competition in a market that creates a significant advantage. For example, when there is knowledge about component sourcing and supplier pricing, individual firms may grow faster. Information about patents and researcher plans can have companies in pharmaceutical and technology initiate strategies that beat their competition.

Such issues are not in a perfectly competitive market. This is because the information is equally and freely available. This means, every firm produces its goods and serves at precisely the same rate and using the same techniques as the other companies in the same market.

In many instances, governments play a significant role in market systems. They impose regulations and price controls that shield both suppliers and consumers. Hence, they can control how firms enter or exit the markets. For instance, there are laws governing how the pharmaceutical industry does its research, product, and sale of drums.

These rules call for hefty capital   investments, including employees such as legal advisors and quality assurance, as well as infrastructure like machinery. When the costs are put together, it becomes costly for a company to bring a drug on the market.

The technology industry, on the other hand, works with less oversight. This means starting a company in technology is much easier and cheaper, and doing so in the pharmaceutical industry.

In a perfectly competitive environment, these controls do not exist. There is no restriction on how firms enter and exit the market.

In perfect competition, there are no issues with transport. Companies do not pay a lot for transport. As such, they can reduce the production costs as well as cut back the delays on transportation.

A perfectly competitive market is theoretical. Hence, finding an excellent example of real-life is not easy. But there are variants in the society that may bring out something close to perfect competition.

Think of a farmers’ market. Here, you will find many small buyers and sellers. There is often very little difference between their products, prices, and what others are selling. There is even no difference in the branding and packaging of the products. Thus, if one farm goes out of business, it may not leave any impact on the average price of the markets.

Also, consider supermarkets. In many cases, they stock the aisles in the same way from a set of companies. They all sell the same products, with little to no difference, including packaging, branding, and pricing.

Consider also the market for unbranded products. They are only cheaper versions of well-known products, and there no added value. Hence they retail at the same prices with no major differences generally.

Technology has also created another category of perfectly competitive markets. For instance, you will find all types of e-commerce sites offering similar products. Mostly, it is all about what they are selling. The internet is free and largely available; entry and exit are easy.

From an idealistic point of view, the perfect competition offers the perfect framework for the market establishment. However, the market is full of flaws and disadvantages. For instance, there is a lack of innovation. Firms are motivated to create better products and set themselves apart as an incentive to gain a more significant market share. For in perfect competition, a firm can possess dominance, hence no need for playing smart.

Demand and supply draw for fixed profit margins. Hence, a firm cannot charge premiums for their products and services. In such an environment, it would be very difficult for a company like Apple Inc to survive. Their phones are pricier than the competition.

This section introduces the student to how monopolies form (and) barriers to entry, the impact of output and price on profit-maximization, and monopolistic competition.

Before we go further, let's step back a bit into the history of monopoly. In 1773, one firm, East India Company, was on the verge of a big fail. It was going through a hard time for financial difficulties. But the British Parliament came to save the failing company by introducing the Tea Act. The law continued taxing tea and made the East India Company the only recognized tea supplier to American colonies. This step gave them legal monopoly power. But by November the same year, Boston citizens couldn’t take anymore. They refused tea unloading, stating, “no taxation without representation.” To cut the story short, things did not go very well.

A similar situation happened on the eve of the American Civil War in 1860 with the U.S cotton industry. The South was considering receding from the Union; hence they hoped to leverage on Britain imported coffee. But cotton –merchants refused to export their cotton; hence failing what was termed as “The King Cotton” strategy in 1861. Britain opted to other sources, but this affected the confederacy’s gold supply.

What we learn here is that monopoly sellers often don’t see a threat to their positions in the market. But it is all about the attribute of imperfect competition markets.

As we have learned above, a perfect competition environment is where no firm has market power. They only respond to market prices and changes. A monopolistic market is the opposite, where there is no competition at all. There is only one producer on the market, and they are responsible for changing the prices as they want. The consumer has no choice but to accept what they are given.

It is, however, important for a monopoly on being concerned about how the consumers will purchase their products. However, a monopolist never has to worry about the actions of other firms. They are not price-takers, as we saw with perfect competition.

In imperfect competition, the market violates tenets of the perfect competition. In other words, it allows some firms to have a stronger command on the market than others. It is an economic market that ignores the standards of purely competitive markets.

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In this case, companies come up with different products and services. They set their own price, and each fight for market dominance. Apart from monopolies, they are also found oligopolies, monopolistic, monopsonies, and oligopsonies.

A single-priced monopoly is a situation where a company must charge the same price to all consumers. In this case, the company majorly relies on aggregate demand.

Consider Oakley, Ray-Ban, and Persol sunglass companies. They are all owned by Luxottica, an eyewear company based in Italy that makes about 70% of all brand eyewear. This means the company dominates the market. But it is not a single-price monopoly. This is major because it bears different brands targeting different consumers; hence, they practice a form of price discrimination. If the company sold only a single category of glasses, they would have to sell at the same price, even if they owned 100% of the market. If they decided to lower the price, it would have to be for all consumers, and that would have a huge impact on their revenue. In a monopoly, price reduction leads to losing revenue, and the more sales they make, the greater the loss.

One of the drawbacks of imperfect competition is government intervention. Well, this may not be a limitation per se, considering that government regulations can help correct monopoly. They set policies that increase the quantity. But as we may already know taxes and price floors negatively affects quantity, which they will not work here. A subsidy, on the other hand, would increase market surplus, but it would be very difficult to implement. Perhaps the only option for this situation would be the price ceiling. Thus it will be reasonably applicable in reducing the deadweight loss. The most important thing here is sustaining the market equilibrium while protecting the consumers and the firm.

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THE DYNAMICS OF IMPERFECT MARKETS QUESTIONS AND ANSWERS GRADE 12

Activity 1 Use the table below of a typical monopolist and plot the revenue curves on the same set of axes. Notice the position of the Marginal revenue curve in relation to the Demand curve.

Activity 2 Complete the following table by filling in the missing information:

[20] Answer to activity 2

[20] Activity 3 Study the following graph and answer the questions that follow:

• Define the term imperfect market. (2)
• Motivate why the above graph indicates short-term equilibrium. (4)
• Which point on the graph indicates profit maximisation? (2)
• Calculate the economic profit. (6) [14]

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