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What is an Imperfect Market?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 17 September 2016
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An imperfect market is any type of investment market where relevant information is not made readily available to buyers and sellers. As a result, the process of matching buyers and sellers is also affected, a situation that in turn delays the execution of various types of transactions. An imperfect market may also exhibit what is known as imperfect competition, a situation in which a single entity or small group of entities control the movement of the market, especially in terms of price.

There are a number of factors that go into the creation of an imperfect market. One of the more common issues has to do with effective access to information regarding the background and current status of individual securities traded on a market, as well as data regarding the projected movements of those securities and the market as a whole. When this information is not readily available to investors, their ability to make informed investment decisions is adversely affected, a situation that has a cumulative effect on the overall efficiency of the market itself.

Along with the slow or incomplete dissemination of information, an imperfect market may also be slow to execute orders. When this happens, the process of matching those who are selling securities with investors who want to buy securities is compromised. A market attempting to function under these circumstances is likely to become somewhat sluggish, a situation that can make some investors unsure about the future of their investments.

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In order to deal with situations that arise and lead to the development of an imperfect market, many governments enact laws that minimize the possibility of a block in the flow of information, and help to expedite the orderly processing of trading. Government interventions sometimes take the form of investigations into reports of unethical or illegal activity that may be hampering the efficiency of a market, and possibly threatening to undermine the general economy. If the investigation uncovers activity that is deemed to undermine free trade and fair competition, it is not unusual for governments to take steps that help to avoid market failure and thus cripple the national economy, and ultimately the world economy.

For many analysts, all the markets around the world are actually imperfect in one way or another. To them, the idea of a marketplace that is devoid of information delays, executes orders quickly and efficiently, and is free of any type of domination or monopoly situation, is more of a goal than a reality. Still, many of the regulations and standards put in place by regulatory agencies in different countries are aimed at reducing these imperfections as much as possible, and moving the function of the markets closer to this goal of perfection.

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donasmrs
Post 3

@turquoise-- Yes, a market where there isn't fair competition is an imprefect market.

The article already talked about this actually. A perfect market is one that is free, meaning that everyone has the chance to participate and no single player dominates. When one participant, such as a company, starts dominating the market, it's called a monopoly. This makes competition unfair because the other companies don't have as many opportunities to participate and sell their goods. This is an imperfect market.

turquoise
Post 2

I don't understand the link between fair competition and an imperfect market. All markets where there isn't fair competition imperfect?

burcinc
Post 1

I'm not an expert on the economy but as far as I understand, the investment world is a very fast one. This is because values of goods and investments are always changing. I mean, think about the stock market. So many things can happen within a matter of minutes. Based on changing values of stocks, investors decide whether they want to buy or sell. People can make money or lose money based on the decisions they make. And they often have to make these decisions very quickly in light of the information that comes in.

But what if information stops coming in? What if you don't know if your stocks are losing value or increasing in value? Then, things will freeze but that itself has a negative effect on stock prices. So in order for the system to work, the information needs to arrive at a timely pace to keep investors informed of all the changes.

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