In this guide, we look at the characteristics of perfect competition alongside examples in different industries.
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Perfect Competition Definition
A perfect competition is a market structure where competitors sell identical products to the same market, and none of these competitors has control over prices. In perfect competition, prices are determined by the forces of supply and demand. This is due to many buyers and sellers producing and buying goods and services.
Unlike a monopoly, where only a single firm supplies goods and services, reaping maximum profits in a perfect market, the existing firms are enough to keep them floating in the business. Any attempt to maximize profits through prices might lead to the business being kicked from the industry with new ones making their entry.
Characteristics of Perfect Competition
1. Absence of controls:
The government’s role in the market is to impose regulations and regulate prices. The government is also responsible for setting costs for entering and exiting the market. Government’s control is non-existent in perfect markets. Entry and exit in a perfect market is unregulated, and therefore new companies do not have to incur unnecessary charges.
2. Many sellers and buyers in the industry:
Unlike monopolistic and monopoly markets, perfectly competitive markets consist of small competing firms. The absence of large companies means that a single firm won’t take advantage and try controlling the market. Many buyers and sellers in the market help ensure that firms sell at an equilibrium price. Any business trying to sell at a price higher than the equilibrium risks going out of business due to extremely high competition.
3. Forces of demand and supply set prices:
Demand and supply determine prices since we have already established that there are many buyers and sellers in the market. These forces of supply and demand will determine the price. Prices, therefore, have to be at equilibrium due to the extremely high competition.
4. No barriers to market entry and exit:
Costs for a new business to enter the markets are relatively low. There are no policy barriers from the government to prevent a firm from exiting an industry, unlike the monopoly market structure where the existence is an advantage to the welfare of the consumers and government. A perfect market consists of many participants, and competitors are oriented toward the welfare of the consumers.
5. No ignorance on prices changes for both buyers and sellers:
This is a situation where buyers know every price in the market. Therefore sellers will avoid raising prices since the consumers will prefer buying at a lower price than at a higher price. This also applies to the quality of a commodity, where consumers will know who has a better quality of commodity. This is where the aspect of homogeneity comes in.
6. Firms produce and sell homogeneous products:
Products sold are similar and have minimal differences in branding, pricing, and features present. This is to ensure that the buyers don’t differentiate between the products based on their physical attributes or pricing. In other words, products for competitors are perfect substitutes for each other.
Perfect Competition Examples
Perfect competition market structure is an economic concept that doesn’t exist in reality. This is because, in reality, there are many brands available, the quality of goods and services is different. Below are some sectors’ example of perfect competition:
1. In the agriculture sector
Products sold are similar in this market. An example is similar crops like cabbages and potatoes. Many farmers produce these products, and many buyers purchase them since everybody eats them. There is also a minimal cost to entering the agriculture sector; all they have to do is start working if anyone wishes to enter.
2. Foreign Exchange
Many traders trade similar currencies in foreign exchange markets in foreign exchange markets. In addition, it is straightforward to enter the market once one gets an opportunity to describe the aspect of no barriers to entry and exit in the market.
3. Technology sector
The technology sector has characteristics similar to the perfect market. An example is companies that manufacture phones. The majority of phones available in the market are similar or have tiny differences. This makes it very easy for consumers to choose and buy.
Regulation of Perfect Competition
Theoretically, perfect markets should operate successfully on their own without any regulations and price control. However, if there are inefficient resources and a situation of unstable equilibrium emerges, the government will interfere with stabilizing the situation. So if, theoretically, the perfect unregulated market becomes a problem, then the government has to intervene and correct the said problematic situation.