# Imperfect Markets: Definition, Types, and Effects on Economics

![Imperfect Markets: An economic market that does not meet the rigorous standards of a hypothetical perfectly competitive market.](https://www.investopedia.com/thmb/777qAZBblKyX-FKM-yLx4ZiIi8c=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/imperfectmarket.asp-final-3b126b9789d44042ba6da4534871b759.png)

*— Investopedia / Mira Norian*

## What Is an Imperfect Market?

Imperfect markets encompass all real-world economic markets that diverge from the theoretical framework of perfect competition, where numerous buyers and sellers interact with complete information. Unlike the perfect competition model, imperfect markets are characterized by limited competition, barriers to entry or exit, and influence over prices by individual buyers and sellers. This article delves into the various types of imperfect markets, their characteristics, and their broader economic consequences.

### Key Takeaways

*   Imperfect markets are defined by deviations from the perfect competition model, featuring elements like high barriers to entry and limited competition.
*   Unlike perfect markets, which are theoretical, all real-world markets are considered imperfect due to factors like information asymmetry and price setting by sellers.
*   Key types of imperfect markets include monopolies, oligopolies, monopolistic competition, and monopsonies, each with unique structures and implications.
*   Government intervention in imperfect markets, such as antitrust laws, aims to correct inefficiencies but is debated due to potential unintended consequences.
*   Understanding imperfect markets involves recognizing their inherent inefficiencies and the diverse range of market behaviors they exhibit.

## Characteristics and Dynamics of 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 implications of economic activity, economists only use [perfect competition](https://www.investopedia.com/terms/p/perfectcompetition.asp) models. As 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.

## Impact and 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. These situations often spark major economic debates.

Some economists believe that deviations from perfect competition warrant government intervention to improve efficiency in production or distribution. Such interventions may come in the form of [monetary policy](https://www.investopedia.com/terms/m/monetarypolicy.asp), fiscal policy, or market regulation. Antitrust laws, based on perfect competition theory, are a common example of such intervention.

> **Important**
>
> Governments may use taxes, quotas, licenses, and tariffs to regulate these so-called perfect markets.

Other economists believe [government intervention](https://www.investopedia.com/articles/economics/11/how-governments-influence-markets.asp) isn't always needed to fix imperfect markets. They argue that government policies are also flawed, and officials may lack the incentive or information to intervene correctly. Finally, many economists argue that government intervention is rarely, if ever, justified in markets. The Austrian and Chicago schools notably blame many market imperfections on erroneous government intervention.

## Common Structures 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 imperfections. Imperfect competition occurs in these types of markets:

### Monopoly

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.

### Oligopoly

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.

## Comparing Imperfect and 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](https://www.investopedia.com/terms/e/equilibrium.asp) from any other position. Perfect competition can thus only be theoretically assumed—it can never be dynamically reached.

## The Bottom Line

Imperfect markets, encompassing structures like monopolies, oligopolies, monopolistic competition, and monopsonies, differ from the theoretical ideal of perfect markets. These real-world markets are characterized by competition for market share, high barriers to entry, and the influence of a few dominant players on pricing and production. While perfect markets remain a useful theoretical benchmark, understanding the inherent imperfections in actual markets is essential for navigating economic systems.

Some economists advocate for government interventions, such as fiscal policies and regulations, to address these imperfections and enhance market efficiency. However, others argue that market imperfections can self-correct without external interference, pointing out that government actions can sometimes exacerbate these issues. Recognizing these dynamics will improve the decision-making process in environments that never fully align with the 'perfect market' standard.