PERFECT COMPETITION: CHARACTERISTICS AND EXAMPLES - DUDAS - 2024

The perfect competition is a fictional market structure that meets a set of ideal conditions for the same. In this way, neoclassical economists believed that perfect competition achieved the best results in the economy, benefiting consumers and society in general as well.

Theoretically, in the different models applied in a supposed market of perfect competition, the market would reach an equilibrium between the quantity supplied and the demand for a product. This situation is known as the Pareto optimum, which is the market equilibrium price at which producers and consumers would buy and sell.

characteristics

This hypothetical market is characterized by the following characteristics:

A large number of producers and consumers

There are a large number of people willing to offer a product at a certain price, and a large number of people are willing to consume it at that same price.

Perfect knowledge of the market

The information is fluid and perfect, without the possibility of errors. All producers and consumers know perfectly at what price to buy and sell, so the risk is minimal.

Rational decisions of producers and consumers

By having perfect information on prices and the utility of products, they will make rational decisions for themselves. Producers will seek to maximize their profit and consumers their utility.

Homogeneous products

In the perfectly competitive market, all products are interchangeable. In this way, consumers will not prefer each other, making the price stick.

No entry or exit barriers

Producers are free to leave the market if they don't see a profit. The same thing happens if a new producer sees a possible profit: he will be able to freely enter the market and sell the product.

No producer can influence the market

The producers are many and none has greater market power than another. Therefore, it is not possible that any of the producers have more power and mark the price of the product.

Perfect mobility of production factors and goods

The factors of production and products are perfectly mobile, and they are transported free of charge.

There are no externalities

In perfect competition, no third party is affected by the costs or benefits of the activity. This also excludes any government intervention.

There are no economies of scale or network effects

In this way, it is ensured that there will always be a sufficient number of producers on the market.

Differences with imperfect competition

As we can see, perfect competition is a completely hypothetical structure and impossible to achieve. However, there are markets that can meet some of the characteristics of a perfectly competitive market, while violating others. We call these imperfectly competitive markets.

Therefore, the first major difference between these markets is that the "perfect" label is theoretical, while the imperfect market is the one we find in real life. The differences that we can find between the two are multiple:

Number of producers and consumers

In this case, there can be different types:

Monopoly

It happens when there is a single company that offers a product, without any competition and being able to handle the offer to your liking. In these cases, their activity is usually regulated to avoid abusive behavior.

Oligopoly

An oligopoly exists when there are a few companies that produce a specific product or service. In this case, these companies can form associations called cartels, in order to behave like a monopoly. If it is only two companies, this figure is called a duopoly.

Monopolistic competition

In this situation, many producers compete with a similar product. Production is more expensive for companies than perfect competition, but consumers benefit from product differentiation.

Monopsony

A market with only one consumer for multiple producers.

Oligopsony

A market with a few consumers for multiple producers.

Product differentiation

While in a market of perfect competition all products would be homogeneous and completely substitutable, in an imperfect market there may be a differentiation of them.

This benefits consumers, who have options to choose between one and the other products according to their conditions.

Market information

As has been seen in the characteristics of perfect markets, in these cases there is perfect knowledge of all the market information by all the players.

On the other hand, in an imperfect market this perfect information does not exist. This translates, for example, into the fact that if a company wants to raise the price of a product, consumers can continue to consume it due to ignorance or loyalty to it, despite the fact that there may be substitutes at a lower price.

Entry barriers

In competitively perfect markets the barriers to entry and exit for companies are completely free. However, in the case of imperfect markets there are strong entry barriers for new producers.

For example, the greater market share of some producers means that newcomers who want to enter have to invest a very large amount of capital in order to compete with them.

Influence in the market

While in perfect competition no producer has a greater market share and therefore does not have the power to influence the market either, in imperfect competition the opposite occurs. Producers with more power can alter product prices, influencing the rest of the market.

Examples of perfect competition

As seen above, perfect competition is a theoretical exercise that cannot be achieved in real life. However, for a better understanding we are going to imagine a hypothetical real situation of perfect competition.

To do this, we are going to take Spain as the country that produces a typical product: the potato omelette. If this market were of perfect competition, there would be multiple tortilla producers, with multiple consumers.

These producers would produce exactly the same tortilla, causing consumers not to have the slightest inclination towards one or the other. Furthermore, supply and demand would always be constant, since the price would be the same for all (equilibrium price, Pareto optimal).

It would not be convenient for companies to increase it, since consumers would directly buy from other producers. All this information would be known by producers and consumers, making the whole system work smoothly and rationally.

If someone sees that they could make a profit in the tortilla market, they could perfectly and without barriers enter this market as a producer. In addition, the whole movement of tortillas would be free and free.

As we can see, this case would not be possible to achieve in real life. However, it is a good way to measure the different forms of the existing market, to try to get as close as possible to this hypothetical perfect situation.

Possible perfectly competitive markets

Although it is generally believed that perfect competition in the real world is not possible, some possible examples could be:

Bread

As Larepublica.co explains:

“$ 250 roll loaves that are similar in every bakery and on every block there are at least two coffee shops with their own baker. If at Dona María's bakery they raise the bread to $ 300, then we go to the one on the other corner, which is cheaper. This is perfect consumer mobility. "

farming

According to the website businesszeal.com, agriculture markets are the closest representation of perfectly competitive markets. They have a large number of vendors that offer fruits or vegetables, being identical products.

The prices of these goods are competitive and no single seller can influence the price. Consumers can choose any vendor.

Free software

According to the website businesszeal.com, free software could also work in a similar way to agricultural markets. Software developers could enter and exit the market at will. The price would also be determined by market conditions, rather than by sellers.

References

1. O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 153
2. Bork, Robert H. (1993). The Antitrust Paradox (second edition). New York: Free Press
3. Petri, F. (2004), General Equilibrium, Capital and Macroeconomics, Cheltenham: Edward Elgar
4. Garegnani, P. (1990), "Sraffa: classical versus marginalist analysis", in K. Bharadwaj and B. Schefold (eds), Essays on Piero Sraffa, London: Unwin and Hyman, pp. 112–40
5. Stigler JG (1987). "Competition", The New Palgrave: A Dictionary of Economics, Ist edition, vol. 3, pp. 531–46
6. Lee, FS (1998), Post-Keynesian Price Theory, Cambridge: Cambridge University Press.