Most of the real markets are imperfect markets. A market is imperfect if it lacks one or more of the conditions that economic theory imposes on a perfect market. In other words, the imperfect market does not meet the conditions of the perfect market. It is sufficient if a prerequisite for the economic theoretical concept of the perfect market is missing.
In this lesson you will learn about the imperfections of the market. You will learn how the imperfect market fits into the various economics markets and how it differs from the other markets. The practice questions at the end of the lesson will help you test and manifest the knowledge you have learned.
- Synonyms: imperfection of the market
- English: imperfect market
Why is the imperfect market important?
In reality, imperfect markets occur much more frequently than a perfect market, which largely functions as a model. This means that there is a multitude of markets whose prices for goods are different and which have a differentiated range of goods. Instead of market transparency, as is the case with the perfect market, there is confusion with regard to prices. This means that additional considerations must be incorporated into the pricing policy.
The classification of the imperfect market in the various markets in an economy
A market is the place where the buyer and supplier of a certain product or service meet. In an economy there are numerous markets that can be differentiated based on certain characteristics.
There are several types of markets, which are differentiated on the basis of different criteria:
- According to the type of goods traded
- According to spatial expansion
- According to qualitative criteria
Differentiation according to the type of goods traded
With regard to the type of goods traded, a distinction is made between goods and consumer goods, services, capital goods and real estate.
Differentiation of traded goods:
- Goods and consumer goods are goods for end use.
- Services can be all types of business services as well as trading in insurance.
- The capital goods market includes all goods that are used to manufacture other goods, for example machines.
- The real estate market includes trading in residential and commercial real estate as well as land.
Differentiation according to the spatial extent
Markets can also be divided into local or regional markets, national markets, international markets and the world market according to their spatial extent.
Differentiation of spatial expansion:
- Local or regional markets are typical for products that perish quickly or cause high transport costs. Personalized services such as cosmetics, hairdressing or coaching are also offered in local markets.
- National markets are markets that arise from the legal framework in a particular country. They are differentiated from one another, for example, by tax laws and regulations in the area of environmental protection.
- On international markets, trade takes place between market players from different countries. The international market differs from the world market in that not all global players are necessarily represented here. An example of an international market is the European Union market.
- On the world market of goods and services are traded worldwide. It differs from other markets in that there is a uniform world market price. This means that the world market price differs from national or local prices. The reasons are customs duties, transport costs and other trade barriers.
Differentiation according to qualitative criteria
It is also possible to differentiate between markets according to qualitative criteria, namely according to organization, pricing and market entry options.
Differentiation of qualitative criteria:
- Depending on the type of organization, markets are divided into organized and unorganized markets.
- Depending on the type of pricing, there are perfect and imperfect markets. The perfect market, which has a model function as an ideal market, is a competitive market in which pricing functions without problems. This is not the case with pricing in imperfect markets.
- A distinction is made between open and closed markets based on the type of market entry options.
With open markets, market participants benefit from the fact that there are no access restrictions.
Conversely, in closed markets there is restricted access for market participants. Examples of access restrictions are legal or economic regulations, including certificates, a minimum capital requirement or certain qualifications, whereby these requirements can occur in various combinations.
There are also factor markets where companies can buy the production factors and input quantities that they need to produce the goods in question. Examples of production factors are land, labor and capital. The opposite of the factor market is the goods market on which finished goods are sold. Typical factor markets are the labor market, the capital market, the money market and the foreign exchange market.
- Labor is available on the labor market and labor is in demand.
- The capital market is about the provision of long-term capital.
- The money market is about the provision of short-term capital.
- Different currencies are traded on the foreign exchange market.
What is an imperfect market?
According to gradphysics, what is an imperfect market is closely related to the requirements of the perfect market.
Perfect vs. imperfect market
The conditions of the perfect market
The goods must be homogeneous, that is, they must be of the same type. The criterion of homogeneity is met if the goods (1) are objectively similar, (2) have no personal, (3) spatial and (4) temporal preferences.
- The goods are objectively identical if they do not show any objectively identifiable differences.
- There must be no personal preferences on the part of the inquirer. This rules out the case that customers prefer individual providers due to personal preferences or, conversely, that providers prefer certain customers.
- Another prerequisite is that there are no spatial preferences. This rules out the case that the same product achieves different prices in different spatial locations.
- Even temporal preferences are excluded in the perfect market. This prevents the same product from achieving different prices depending on the respective performance date.
In addition, the market must be transparent for market participants. This assumes that you have comprehensive information about what is happening in the market.
If these prerequisites are fully met, it is a perfect market. Its special feature is that the law of indiscriminate prices applies in this market. In other words, in the perfect market there is only one price for any product at any one time.
If even one of the conditions necessary for the perfect market is not met, it is an imperfect market.
Imperfect markets and the different types of markets
Imperfect markets can exist in various forms of market. These include the oligopoly, the monopoly and the polypol.
Properties of perfect and imperfect markets
Types of imperfect markets:
- If the monopoly prevails as the market form, there is only one single supplier who has many buyers for his product. Due to the lack of competition, the monopoly offers freedom of choice in terms of sales volume and price.
- In the oligopoly, there are few suppliers and many buyers, so that there is hardly any competitive pressure here either.
- The opposite of a monopoly is the polypol, in which there are many buyers and extremely many suppliers. Correspondingly intense is the competition between the polypolists, who have to come up with a lot in order to win over the customers.