Perfect competition

Perfect competition refers to a type of market structure where there is very high competition as there are high numbers of sellers and buyers. The products sold at a perfectly competitive market are homogenous, meaning they are the same. There is no actual mark of differentiation among the products, as a result, we can’t say if any industry is leading on it or not. For example, vegetables. 

There are no proper barriers to entry or exit from such markets. As the products are not highly unique or different, hence anyone can enter such a market. Owing to this, the competition keeps increasing.

Perfect Competition is mostly characterised by goods that are in high demand by the consumers, hence the demand chain is consequently high. To match up with the demands, the supply is also intensive. The consumer is well aware of the market trends, hence they can easily shift to a different seller who maybe sells at a lower price. 

 The concept of a perfectly competitive market is mostly hypothetical in economics, as it is based on a lot of assumptions. But it is also one of the most well-known idealistic market structures. In this article, we shall delve deeper into the details on Perfect Competition and the features of perfect competition. 

What is a Market?

Before we begin, let us understand the context and meaning of several terms in economics. A market refers to an arrangement where buyers and sellers can meet to carry out transactions related to the sale and purchase of different commodities and goods.

A market need not be a physical location, and a buyer and seller need not come into face-to-face contact for the transaction to happen. 

A market structure can be defined based on different firms that are distributed throughout the market, the conditions for entry and the markers that differentiate products. A few of the major types of marketing structures are:

Monopoly

A monopoly occurs when the product being offered is unique and hence there is little to no competition for the same. Only a single firm produces it, and hence barriers to entering and exiting a monopolistic market exist.

Monopolistic Competition

In this type of competition, numerous firms have a small share of the market to their own. Each firm has a slightly different product that makes them stand out. There are also close substitutes available for the product, so the firms only have a little control over the price. The barriers to entry and exit from such market structures are not high.

Perfect competition

In a perfect competition type of marketing structure, there is no monopoly on any product as it’s all the same. Theoretically, perfect competition is the opposite of a monopoly. In a monopoly, only one firm sells a unique product, so they can regulate their prices. But in the latter, the goods sold by different sellers are all the same. 

Now that we are aware of the different marketing structures, let us understand the features that make a perfectly competitive market. 

Features of Perfect Competition

A few features that characterise a perfectly competitive market are:

High Competition

A very important characteristic of a perfectly competitive market is that there is a high number of buyers and sellers. This results in high competition, and it makes firms into “Price Takers”. This means that they have to sell at an equilibrium price where supply and demand matches.

They cannot quote their own prices or raise their prices. This is because the product is not unique, so customers can even go to different sellers at little to no cost. 

This might even result in them being forced out of the market for a cheaper alternative. 

Homogenous Goods

Homogenous means similar in the context of economics. The goods that are sold at a perfect competition are mostly similar. Hence, the customers can easily switch buyers without even any particular difference in the product.

An example can be that of dairy products or even poultry products like eggs. Customers can change their buyers without even any significant changes. Rather, supermarkets do often change their dairy suppliers without having their customers notice.

Informed Buyers

The products that are sold are not unique to any firm and are most common. Hence, customers are aware of the different details, like quality, pricing range etc. about the products. In economics, this is also referred to as Perfect Information. 

Since customers are aware of the original quality and how it should be, hence they can easily spot inferior quality products. They are aware of the past and present price trends, hence they can easily move to the next seller if the product is not up to the mark or more expensive. 

Vegetables are a great example of this. If a customer finds the veggies to be not fresh, he or she will move to a different vendor without too many thoughts on it.

Equal Market Share

All firms and competitors have similar prices. As already iterated, this is among the very common features of perfect competition, where no seller can quote their own separate price. Their Marginal Revenue=Marginal Cost, hence the price cannot be altered. Keep a price low, you run the risk of losing any negligent profits. Keep the price too high, you will lose customers.

No barriers in entry and exit

There are very few barriers in terms of entry or exit. In the oil or energy business, there has to be a huge investment before you can join such a business, or maybe in a tech business, there are government regulations present. But in perfect competition, such conditions are little to none. 

Perfect Competition Examples

The concept of a Perfect Competition may be based on assumptions, but there can be a few features of perfect competition found in some places. Two such perfect competition examples are:

Farm Produce or Agriculture

A perfect example of a perfectly competitive market is that of fresh produce like vegetables and fruits. There is very little in terms of differentiation when it comes to farm produce.

Only very few firms market or brand their vegetables differently as organic or perhaps some other technology tested. But in an average veggie or fruit market, you can find all sellers to have the same average price. Closing of business on the part of any single vegetable seller doesn’t affect the average price of the product, either.

E-Commerce Products

Another platform where we see competition increasing day by day is the e-commerce platform. Once a product gains popularity on e-commerce, you can see a hundred knock-offs of the same. On eCommerce platforms, customers can gain perfect knowledge of products by comparing prices and quality. There is also little to no entry and exit barrier on e-commerce platforms like Amazon or eBay, etc.

Conclusion

The key takeaway that we learnt from this article is that a perfectly competitive market is a homogenous market. In perfect competition, the firms do not gain much profit, instead, they often suffer losses. 

Firms in a perfectly competitive market can’t even quote their own price and have an equal market share as all customers. The firms do not have any monopoly on the market.