What is an Imperfect Market?

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.

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.