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Perfect Competition : Functions, Features and Examples

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In all competitive exams, the general studies section is a nightmare for all aspirants. Economics is one of the sub-topic of general studies. Here we will discuss “Various forms of markets – Perfect Competition”. This article will surely help one to understand the concept and give one an edge over other aspirants.

Forms of Markets / Market Structure :

“Market structures” refer to the various characteristics of the market that determine the relationship between sellers, from sellers to buyers, and more. Several basic characteristics define the market structure, such as the following:

  • The goods or goods sold and the degree of differentiation of production.
  • Ease or difficulty in entering and exiting the market.
  • Distribution of market share of the largest companies.
  • Several companies in the market.

Perfect Competition :

The term perfect competition indicates an uncontrolled market structure. Although there is hardly better healthy competition in real-world markets, it provides a useful model for explaining how supply and demand affect the prices and behaviour of goods and services in a market economy.
The presence of multiple buyers and sellers indicates a perfectly competitive market, and the prices of goods and services reflect supply and demand. If other companies will enter the market then they will earn a profit, so the companies established in the market earn proper profit only to stay in business.

Key Results :

1. Perfect competition is an ideal type of market structure where all producers and consumers have complete and proper information and there are no transaction costs.
2. In this type of environment a large number of producers and consumers are competing among themselves.
3. Unlike a monopolistic market, a competitive market is purely theoretical.
4. Every real market can be classified as imperfect because these markets exist outside the level of the perfect competition model.
5. When a market violates any pure or new competitive principles, then that market competition is imperfect.

Functioning of Perfect Competition :

In a perfect competition model, no single company has a monopoly. The main features of this type of structure are as follows: 

  • All companies sell and provide similar products and services.
  • Companies cannot influence the market value of their products.
  • The market share of companies does not affect prices.
  • Buyers have accurate information (past, present and future) about the product being sold and the prices charged by each company.
  • There is complete mobility between capital resources and labour.
  • Competing firms can enter or exit the market at no charge.

It can be compared to true imperfect competition, which exists when a market, hypothetical or real, violates the abstract principles of pure or perfect innovative competition.
Since all real markets exist outside the plane of the perfect competition model, each can be classified as imperfect. The contemporary theory of imperfect versus perfect competition stems from the post-Cambridge tradition of classical economic thought.

Features of Perfect Competition :

A perfectly competitive market is explained by the following factors:

1. A Homogeneous and Large Market :
A perfectly competitive market has a large number of agents and vendors. Vendors are small businesses rather than large corporations able to control prices through supply adjustments. They sell products with minimal differences in capabilities, features and prices. This ensures that buyers cannot differentiate between products based on physical characteristics, such as size or colour, or intangible values, such as a brand name.

A large population of buyers and sellers ensure that supply and demand remain stable in this market. As such, buyers can easily substitute products made by one company for another.


2. Accurate Availability of Information :
Information about an industry’s ecosystem and competition is an important advantage. For example, knowledge about component sourcing and vendor prices can make or break a market for some companies.
In some knowledge- and research-intensive industries, such as pharmaceuticals and technology, information about patents and competitive research initiatives can help companies develop competitive strategies and build a moat around their products.


3. Lack of Control :
Governments play an important role in product market creation by implementing price regulations and controls. They can control the entry and exit of companies in the market by establishing rules to operate in the market. For example, the pharmaceutical industry has to deal with a series of regulations relating to the development, production and sale of drugs.

In turn, these regulations require large capital investments in the form of employees, such as lawyers and quality control personnel, and infrastructure, such as machinery to manufacture drugs. The cumulative cost increases and companies become extremely expensive to bring the drug to market.
By comparison, the tech industry operates with relatively little oversight compared to its pharmaceutical counterpart. Therefore, entrepreneurs in this industry can start companies with low or zero capital, which makes it easy for people to start a company in the industry.
The entry and exit of firms in such a market are unregulated, and it frees them to spend on labour and capital assets without restriction and to adjust their output to the demands of the market.


4. Economical and Efficient Transportation :
Cheap and efficient transportation is another feature of perfect competition. In this type of market, the transportation cost incurred by the companies is low. This further helps in reducing the price of the product and minimizes the delay in the transportation of goods.

The Reality of Perfect Competition vs. Theory :

The real-world competition differs from this norm primarily because of variations in production, marketing, and sales. For example, the owner of a small organic produce store may advertise extensively on grain that is fed to cows that produce manure that fertilizes non-GMO soybeans, thereby setting their product apart from the competition. can be separated. This is what is called differentiation.

The first two criteria (homogeneous product and price taker) are far from realistic. However, for the second two parameters (information and mobility), the global transformation of technology and trade is improving information and resource flexibility. Although the reality is far from this principled, model, the model is still useful because of its ability to explain many behaviours in real life.

Barriers to Entry Restrict Perfect Competition :

1. There are also significant barriers to entry in many industries, such as high start-up costs (as seen in the auto manufacturing industry) or stringent government regulations (as seen in the utility industry), which restrict entry and Limit companies’ ability to exit. , And while consumer awareness has increased with the information age, there are still some industries where shoppers are aware of all available products and prices.

2. There are important barriers that prevent perfect competition from developing in the economy. The agricultural industry is probably close to perfect competition because it is characterized by many small producers who cannot change the selling price of their products.

3. Commercial buyers of agricultural commodities are generally very well informed, and although agricultural production does include some barriers to entry, it is not particularly difficult to enter the market as a producer.
Advantages and Disadvantages of Perfect Competition

4. Perfect competition is an ideal framework for a market economy. While it provides a convenient model of how the economy works, it is not always accurate and leads to significant deviations from the real-world economy. Like other models, a perfect competition structure is only accurate to the extent that it reflects actual conditions.

5. A notable feature of perfect competition is the low-profit margin. Since all consumers have access to the same products, they naturally gravitate towards the lowest prices. Companies cannot differentiate themselves by charging a premium for high-quality products and services. For example, it would be impossible for a company like Apple (AAPL) to exist in a perfectly competitive market because its phones are more expensive than its competitors.

6. Another is the absence of innovation. The potential for increasing market share and standing out from the competition is an incentive for companies to try and develop better products. But under perfect competition, no firm has a dominant market share, which means that the long-term profitability of its operations is zero.

7. Another disadvantage is the lack of economies of scale. Limited zero profit margin means companies will have less cash to invest in expanding their production capabilities. Expanding production capacity can potentially reduce costs for consumers and increase business profit margins. But the presence of many smaller companies in the market for the same product prevents this and ensures that the average company size remains small.

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Last Updated : 01 Nov, 2022
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