Market distortion is the lack of free and open competition in a market, whether through intentional actions or prevailing market conditions. Further distortion occurs when governing bodies step in to regulate the market, for example by setting price floors or ceilings or offering tax subsidies.
A market may become distorted when a single business holds a monopoly or when other factors prevent free and open competition. This distortion causes problems for consumers as well as for private sector businesses following standard procurement procedures. A lack of competition typically means higher prices.
A monopoly may exist because of a lack of competition or not enough strong competitors. An effective monopoly situation can arise in a number of ways:
- Intellectual property ownership can prevent other suppliers from filling a need.
- Customers may specify source requirements.
- There may be prohibitive costs for switching suppliers.
- A lack of technically acceptable solutions may exist among competitors.
- Company policies may form barriers to businesses or international suppliers.
A distorted market also can result when multiple companies form cartels to intentionally control markets instead of competing with one another.