Discuss in detail the characteristics of perfect and imperfect markets under the Ability of suppliers to change prices
The ability of suppliers to change prices is a crucial factor that affects the characteristics of perfect and imperfect markets. The perfect market is a hypothesis, where all goods and services are identical, and there are a large number of buyers and sellers, and economic actors have perfect information about prices, quality, and quantity. On the other hand, the imperfect market has a limited number of sellers, products are not identical, and information is not perfect. In this context, we will discuss the characteristics of perfect and imperfect markets under the ability of suppliers to change prices.
In a perfect market, suppliers do not have the ability to change prices as they are price-takers. The price of the product or service is determined solely by the market forces of supply and demand. Therefore, the price of the product or service in a perfect market is stable and uniform across all sellers. This characteristic ensures that there is no price discrimination, and all buyers have equal access to the product or service. Additionally, the total supply of the product or service is equal to the total demand, and there is no surplus or shortage of the product. This ensures that the market is always in equilibrium, and no buyer or seller has a dominant position.
In contrast, in an imperfect market, suppliers have the ability to change prices as they are price-setters. In an imperfect market, the prices of the product or service are not stable, and different sellers charge different prices for the same product or service. This results in price discrimination, where the seller charges different prices to different buyers. This discriminatory pricing leads to market inefficiency and reduces consumer welfare. Additionally, in an imperfect market, the supplier can take advantage of their market power and influence the price of the product or service. This results in the supplier charging a higher price than the market equilibrium price, resulting in deadweight loss and decreased productivity.
In conclusion, the ability of suppliers to change prices has a significant impact on the characteristics of perfect and imperfect markets. In a perfect market, the prices are stable, uniform, and there is no price discrimination, while in an imperfect market, the prices are not stable, various sellers charge different prices, and there is price discrimination. Therefore, policymakers and regulators need to ensure that they create policies that promote perfect competition and prevent monopolistic behavior that could be detrimental to the market's efficiency.
Ability of suppliers to change prices is related to market power, which refers to the degree of control a supplier has over the prices of goods or services in a market. When analyzing the characteristics of perfect and imperfect markets, we can consider how the ability of suppliers to change prices impacts market behavior.
1. Perfect markets:
In a perfect market, there is perfect competition where no individual supplier has control over the market price. The following characteristics are typically associated with perfect markets regarding the ability of suppliers to change prices:
a. No individual seller can influence the market price: In a perfect market, suppliers are price takers, meaning that they passively accept the market-determined price. They have no power to change prices and must accept the prevailing price set by market forces.
b. Numerous buyers and sellers: Perfect markets consist of a large number of buyers and sellers, ensuring that no individual player has enough market power to change prices.
c. Homogeneous products: Products in perfect markets are identical or very similar, reducing the ability of any supplier to differentiate their products through price changes.
d. Perfect information: Buyers and sellers have complete information about prices, quality, and availability, allowing them to make informed decisions and limiting the ability of suppliers to exploit information asymmetry for price changes.
e. Easy entry and exit: Perfect markets allow for easy entry of new competitors and exit of existing ones, which prevents any individual supplier from gaining significant market power.
2. Imperfect markets:
In contrast, imperfect markets have varying degrees of market power which affect the ability of suppliers to change prices. Some characteristics of imperfect markets regarding the ability of suppliers to change prices are as follows:
a. Market power of suppliers: In imperfect markets, individual suppliers or a group of suppliers have the ability to influence prices. They may have control over the supply of goods or services, allowing them to increase or decrease prices based on their market power.
b. Barriers to entry: Imperfect markets often have barriers to entry, such as high capital requirements, economies of scale, or legal restrictions, which limit the entry of new competitors. This lack of competition can give suppliers more control over prices.
c. Product differentiation: In imperfect markets, products may have unique features or brands that differentiate them from competitors. This differentiation can provide suppliers with some ability to change prices based on perceived value.
d. Incomplete information: Unlike perfect markets, imperfect markets may exhibit information asymmetry, where suppliers have more knowledge about their products or market conditions than buyers. This can allow suppliers to manipulate prices by exploiting the lack of information buyers have.
e. Collusion: In some imperfect markets, suppliers may collude to control prices collectively. This can lead to price-fixing and restrict competition, enabling suppliers to change prices collectively rather than competing with each other.
It's important to note that real-world markets often fall somewhere between the perfect and imperfect market models. The level of competition and the ability of suppliers to change prices can vary across industries and regions.
The ability of suppliers to change prices is an important characteristic when comparing perfect and imperfect markets. Let's discuss these characteristics of each market type:
1. Perfect Markets:
In a perfect market, suppliers have no control over the prices of their products. They are considered price takers because they have to accept the prevailing market price to sell their goods or services. The key characteristics of perfect markets in relation to the ability of suppliers to change prices are:
a. Perfect Competition: Perfect markets are characterized by perfect competition, meaning there are many buyers and sellers that offer identical products or services. This ensures that no individual firm has the market power to influence prices.
b. Acceptance of Market Price: Suppliers in perfect markets are price takers, which means they must accept the market-determined price as determined by the forces of demand and supply.
c. Price Elasticity: In perfect markets, sellers generally face perfectly elastic demand. This implies that any small change in price by a supplier will cause buyers to switch to alternative suppliers, leading to a complete loss of market share for the supplier implementing the price change.
d. Homogeneous Products: Products or services in perfect markets are identical, with no differentiation among them. This ensures that buyers have no preference for one supplier over another and solely make purchasing decisions based on the price.
2. Imperfect Markets:
In contrast to perfect markets, imperfect markets have characteristics that give suppliers some control over the pricing of their goods or services. The key characteristics of imperfect markets in terms of the ability of suppliers to change prices are:
a. Market Power: Suppliers in imperfect markets possess market power, allowing them to influence prices to some extent. This power arises due to factors such as limited competition, product differentiation, patents, or other barriers to entry.
b. Price Setting: In imperfect markets, suppliers have the ability to set their prices above or below the prevailing market price. Unlike perfect markets, they are not bound to accept the market price and can exercise pricing discretion based on their market power.
c. Price Differentiation: Suppliers in imperfect markets often engage in price differentiation strategies. They may offer various pricing tiers or discounts based on factors such as customer preferences, location, or product features. This allows them to target different segments of the market and extract higher prices.
d. Elasticity of Demand: The demand curve in imperfect markets can vary in terms of elasticity. Depending on the level of product differentiation and substitutes available, suppliers may have some or limited control over demand elasticity. Suppliers with more differentiated products have more control over demand elasticity.
In summary, perfect markets are characterized by the inability of suppliers to change prices as they operate in a state of perfect competition, while imperfect markets allow suppliers to have some control over prices due to factors such as market power and product differentiation.