Answer to Question #208088 in Microeconomics for clara

Question

Explain why any imperfect market structure is one of the sources of market failures. Give an example by showing graph/calculation and descriptions.

Answer 1

• These are market structures that do not meet the defined standards of a hypothetical perfectly or purely competitive market.
• These markets are characterized by having competition for market share, high barriers to entry and exit, different products and services, and a small number of buyers and sellers.
• Furthermore, there is imperfect or incomplete information about products. When there is new information, it is not quickly transmitted and there is little reactions towards the same.
• The most critical characteristic of imperfect market structure is the fact that price of products is made by price makers and not by market forces of demand and supply

Examples of imperfect market structures are

• Monopoly
• Oligopoly
• Monopsony and oligopsony
• Monopolistic competitions

We shall use the graphical analysis of an oligopoly to illustrate this.

In the above representation the sellers are the price makers. They then sell commodities that will enable them maximize their profits. Consequentially, there will be no equilibrium in the market resulting to supernormal profits and deadweight loss.

This is a market failure.