Perfect competition is a hypothetical concept of a market structure. Perfect competition, also termed pure competition is an ideal market scenario, where all competitors sell identical products, each having a small share in the market.
Perfect competition is a theoretical concept like the Euclidean line, which has no width and no depth. Just as we’ve never seen that line there has never been truly free enterprise.
– Milton Friedman
The market price in perfect competition is not determined by the sellers, but purely rides on the merit of the product. Safe to say, then, that perfect competition exists mostly in theory, with the exception of a few, isolated cases.
Understanding Perfect Competition
Perfect competition constitutes a market with infinite sellers and buyers. All sellers bring homogeneous products to the market. Owing to the large number of sellers, the prices of commodities remain more or less stable, and no single seller would be able to influence a price hike. In other words, sellers are compelled to adhere to market rules.
The competition existing between the sellers in the perfectly competitive market is totally impersonal, which is what makes it ideal. The supply of homogeneous product ensures that the products are available for consumers whenever they wish to make a purchase. Illegal pricing tactics and hoarding find no place in a purely competitive market.
Economists have every reason to believe that perfect competition is the best market structure to protect the interests of the common consumers. Profit maximization remains the sole aim of the sellers in a perfectly competitive market. Due to the existence of many sellers, the market share of each seller automatically reduces in a perfectly competitive market, leaving them with ample freedom to enter and exit from the market whenever they wish.
Examples of Perfect Competition
Having examined the definition of perfect competition, it can be understood that such markets do not exist in the real world. However, we can certainly find a few approximations, which have been listed below –
Agricultural markets are the closest representation of perfectly competitive markets. These are marketplaces which have a large number of vendors selling fruit, vegetables, and poultry – namely, identical produce. The prices of goods are competitive, and no single seller can yield an influence over the pricing. Consumers are free to pick any seller, depending upon their choice.
Free software also functions along similar lines as agricultural marketplaces. In this case, software developers are free to enter and exit the market according to their will. Pricing is also determined by market conditions, rather than the sellers.
Street Food Vendors
Street food vendors are also considered to be a part of a perfectly competitive market. Their products are homogeneous in nature, and they are priced accordingly. Consumers are free to make purchases at any vendor they prefer, and entry/exit barriers for sellers are virtually non-existent.
What Makes Perfect Competition Unrealistic?
The biggest criticism for competitive markets remains the fact that it is extremely passive. It allows no space for innovation or advertising, which are considered to be the pillars of any profit-making enterprise. Product homogeneity is also viewed as an unfair condition which stunts the growth of the trade, and has an adverse effect on human lifestyle in the long run.
In the real world, companies are constantly engaged in a battle, wanting to outdo their competitors. They resort to innovation, price hikes, and advertising to achieve a stronghold in the market. Some of these practices may benefit the consumers, whereas some may not.
Perfect competition is an unrealistic concept, which leaves out the very core of economic development – improvement through innovation. It is an ideal which is impossible to attain in the real world, and is also unnecessary, owing to its rigid parameters.