Imperfect Market
What is Imperfect Market?
Imperfect market structure is part of microeconomics in which
companies sell different products and services, unlike perfectly
competitive markets where homogeneous products are sold, in
real-world most companies belong to imperfect market having
some pricing power with high barriers to entry which results in
companies making greater profit margin as every company tries to
differentiate their products and services through innovative
technologies and advertisement.
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Table of contents
What is Imperfect Market?
o Top 4 Types of Imperfect Market
#1 – Monopolistic Market
Main Characteristics of Monopolistic Market
Example of Monopolistic Market
#2 – Oligopoly Market
Main Characteristics of Oligopoly Market
Example of Oligopoly Market
#3 – Monopoly Market
Main Characteristics of Monopoly Market
Example of Monopoly Market
#4 – Monopsony Market (only one buyer of a product)
Main Characteristics of Monopsony Market
Example of Monopsony Market
o Conclusion
o Recommended Articles
Key Takeaways
Imperfect market structures in microeconomics involve companies
selling diverse products and services, unlike perfectly competitive
markets where products are homogenous.
Most real-world markets fall under imperfect conditions, granting
firms some pricing power and facing high entry barriers.
Imperfect markets encompass various types, including monopolistic,
oligopoly, monopoly, and monopsony markets.
Imperfect markets exist between perfect competition and pure
monopoly, with significant companies operating under oligopoly or
monopolistic competition. In these markets, firms strive to increase
profits and gain market share through non-price strategies, such as
technological advancements and innovative products.
Top 4 Types of Imperfect Market
Market Degree of Product Barriers to Pricing Power Non-Price
No of Sellers
Structure Differentiation Entry of the Firm Competition
Differentiated to sell Advertising
Monopolistic Many Low Some
at a high price Marketing S
Oligopoly Few Big Same Type of Some Pricing Advertising
High
Market Companies Product Power Different Pro
Monopoly
One Unique Products Very High Considerable Advertising
Market
Monopsony Single Buyer Buyer and Seller of Price Decided by Negotiation
Very High
Market Many Sellers New Products Buyers the better bu
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Imperfect market structure can be broken down into four types:
#1 – Monopolistic Market
It is a highly competitive market, with product differentiation being
the main characteristic that helps companies post greater profit
margins. Advertising is an important part of monopolistic
competition. Advertising is the avenue to convince consumers there
is a difference between the products in the same product category.
The extent to which the market participates in product
differentiation determines pricing power.
Main Characteristics of Monopolistic Market
There is a large number of potential buyers and sellers.
The barrier to entry is quite low, which results in easy entry and exit
from the market.
The product offered by each seller is a close substitute for the
product offered by other sellers.
Example of Monopolistic Market
Restaurant businesses are part of the monopolistic market where
the barrier to entry is quite low because of which there are so many
restaurants in each locality. Each restaurant tries to differentiate
from others through advertising and marketing strategies like a
multi-cuisine restaurant or specialty food joints of Dominos or
McDonald’s’.
#2 – Oligopoly Market
Compared to the monopolistic market, an oligopoly market has
higher barriers to entry. The important characteristic of oligopoly
markets is that few firms control the majority of market share
(mostly 2 or 3 firms). In addition, these firms are interdependent for
pricing decisions, which means price change by one firm results in
price change by its competitors. If the price change is not adopted
quickly, the firm will lose customers and market share.
Collusive agreements help companies decide the supply of a
product and get a better price for their products. Since only a few
companies are present in these types of markets, the chances of
firm collusion are very high. Therefore, it increases the profit margin
for companies and reduces future cash flow uncertainty. Such
collusive agreements between a group of companies are called
cartels.
Main Characteristics of Oligopoly Market
Firms typically have substantial pricing power.
Only 2 or 3 big firms exist because of a high barrier to entry & exit
and competition.
There is less potential competition from firms outside the cartel.
Example of Oligopoly Market
A well- known example for an oligopoly market is the
Organization of the Petroleum Exporting Countries (OPEC), where
very few oil-producing countries meet and decide on crude oil
supply worldwide and indirectly control crude oil prices.
#3 – Monopoly Market
As the name suggests, in the monopoly market, a single firm
represents the entire market with significant barriers to entry for
other firms. The distinguishing characteristics of a monopoly are
that the firm produces highly specialized products that no other
firm can produce, because of which there is no competition at all.
Monopoly companies are formed because of many reasons, like
patents or copyrights. Patents and Copyright are given to
companies to reward investment in research and development of
products (like medicine patents).
Another reason for a monopoly is ownership of key resources like
coal mines. A monopoly is also created when the government
grants license or franchise rights to a few companies (like a license
for making defense equipment).
Main Characteristics of Monopoly Market
Firms have considerable pricing power.
The product offered by the sellers has no close substitute.
Product is differentiated through non-price strategies such as
market research and advertising.
Example of Monopoly Market
Microsoft ltd has a monopoly in an operating system. Most users
worldwide use a Microsoft operating system which helps the
company maintain its market share. Entry by a new company is not
easy because of the copyright and patents owned by Microsoft.
After getting US-Food and Drug administration (FDA) approval for
medicine, pharmaceutical companies like Abbott Laboratories get
the right to sell the medicine exclusively for seven years. During
these seven years, no other company could sell the same medicine
in the market, thus creating a monopoly through the research and
development of medicine.
#4 – Monopsony Market (only one buyer of a
product)
In the monopsony market, the single buyer is a major purchaser of
goods and services offered by many sellers. Since a single buyer
and many sellers are available, buyers have significant control over
the market, and in some cases, prices are decided by the buyer
rather than the sellers.
Monopsony buyer’s power generally exists in the factor market,
the market for production services, which includes labor, capital,
land, and raw material used to make products.
Main Characteristics of Monopsony Market
A buyer’s monopoly is possible because sellers have no alternative
buyers to sell their services. A classic example is coal mining in
towns. A company that owns the coal mine (employer or buyer) can
set lower wages for a worker in mines (seller of skills) because they
face no competition from other employers in hiring the worker.
Monopsony or buyer’s monopoly has high barriers to entry because
of high start-up costs and decreasing the average total cost of
existing companies.
Firms in monopsony can capture above-normal profits and a large
share in total gain at the expense of low wages and below-average
working conditions.
Example of Monopsony Market
Supermarket chains like Walmart or Tesco have greater purchasing
power and often negotiate with suppliers to buy at lower prices.
Suppliers like Famers or milk producers don’t have an alternate
option to sell products and agree to price negotiation. This effective
supermarket strategy to buy at low from the supplier and sell at
high to shoppers help them post superior profits and gain market
share.
Conclusion
Real-world markets move from perfect competition to pure
monopoly. Imperfect markets cover the area between a perfect
market to a pure monopoly, with most companies falling
under oligopoly or monopolistic competition. The main purpose of
companies is to maximize profits and gain market share through
many non-price strategies like new technology and innovative
products.
Frequently Asked Questions
(FAQs)
1. What is the difference between perfect and imperfect
market?
The main difference between perfect and imperfect markets lies in
the degree of competition and the level of market power. Perfect
markets have many buyers and sellers, homogenous products,
perfect information, and no barriers to entry, leading to price-taking
behavior. In contrast, imperfect markets have fewer sellers,
differentiated products, imperfect information, and potential market
power, allowing some influence over prices.
2. What is the importance of an imperfect market?
Imperfect markets are important as they drive various real-world
economic scenarios. They offer opportunities for firms to exercise
market power, leading to pricing strategies and differentiated
products. Imperfect markets can also result in economic
inefficiencies and potential for monopolistic behavior, requiring
government intervention to promote competition and protect
consumers.
3. Why is healthcare an imperfect market?
Healthcare is considered an imperfect market due to several factors.
Information asymmetry exists between patients and healthcare
providers, making it challenging for patients to assess the quality
and cost of medical services accurately. Additionally, healthcare
services are often complex and specialized, limiting easy
comparisons. High entry barriers for new healthcare providers and
the presence of insurance systems can further distort market
dynamics, impacting pricing and accessibility.
