Perfect Competition

Perfect competition is a type of market where there are many buyers and sellers, and all of them initiate the buying and selling mechanism. There are no restrictions and no direct competition in the market as all the sellers are assumed to sell identical or homogenous products.

Perfect competition in economics signifies a market that is easy for the market players to enter and exit. It is because the products sold are identical, there is no price dispute, and hence, there exists no fear among the participants.

• Perfect competition is a market structure where many buyers and sellers exist and proceed with the buying and selling system.
• In perfect competition, there are no restrictions and no direct competition. In addition, it assumes that all the sellers are similar or homogeneous products.
• The characteristics of perfect competition are a large market, a homogeneous market, freedom to enter or exit the market, lower government restrictions and obligations, ideal availability of information, and cheap and efficient transportation. 
• The perfect competition market structure is customer-oriented.

Perfect competition is a theoretical market structure where direct competition does not exist between firms or sellers. Instead, many sellers (also buyers) are present in the market that simultaneously sell an identical product at the market price. Thus, each seller has a very small share of the market with limited control over market prices.

Perfect competition is considered the ideal market scenario as it allocates the available resources most efficiently. It is also referred to as pure competition.

However, an important point to note from the above definition is that perfectly competitive market structures do not exist in the real world. Instead, it is used as a benchmark to make a comparative analysis with real markets in economics.

The following is the list of characteristics of perfect competition:

Large Market

A large population of buyers and sellers is present in the market. Sellers are unorganized, small, or medium enterprises owned by individuals. However, a large number of both sellers and buyers maintain the constancy of the demand and supply chain in the market. i.e., a buyer can easily substitute firms to buy its product, and the seller also has a large availability of buyers.

Homogeneous Market

Firms sell identical products with similar features and pricing. Hence, the buyer cannot differentiate between available products based on features and generally has no preference to select a particular product or seller over others.

Freedom to Enter or Exit the Market

In perfect competition, the start-up and production costs are very low, and the demand for products is high. Thus, entry into the market is easy. However, suppose some enterprise incurs losses, and survival in the market becomes difficult due to the heavy competition. Then, it is free to exit, and other players take their place to fulfill the supply requirements.

Lower Restrictions and Obligations from Governments

For sellers, governmental barriers are less. Sellers are allowed to sell their products in the market freely. Similarly, buyers are also free to buy goods and services offered by sellers. Prices are not regulated but fluctuate according to demand and supply chain.

Perfect Information Availability

Sellers have full market knowledge of required costs, technological requirements, marketing tactics, and supply levels as per demands in the market. On the other hand, the buyer is fully informed about products' availability, features, quality, and prices. Hence, manipulating the market by either party is not possible.

Cheap and Efficient Transportation

Transportation is an important part of every business, and in a perfectly competitive market, transportation for the seller is low. Thus, the product prices decrease. Also, an efficient vehicle is easily available, causing a reduction in delays in transporting goods.

Let us have a look at the perfect competition examples below:

Example 1

There are no real-world examples. However,  the nearest approximations may include agricultural markets like many farmers producing similar crops such as wheat or mango.

Example 2

Another example may consist of street food vendors. Various vendors (sellers) exist selling almost identical (homogeneous) products, e.g., burgers. The consumer has full information about the product (burger here) and its prices.

Let us assume a burger costs around $5. A vendor cannot sell his burgers at higher prices (i.e., negligible pricing power). Customers are free to purchase their burgers from any vendor of their choice. Also, barriers to entry and exit for vendors in the market are virtually negligible; hence competition is very high.

The following are the advantages of perfect competition: -

• Perfect competition markets are theoretically ideal market structures.
• Perfectly competitive market structures focus on consumers. The consumer is the king in such market situations. Consumers have readily available substitutes for both products and sellers and can easily switch to others if required.
• Sellers have no pricing power, as in the case with a monopoly market, and the absolute control of pricing remains under demand and supply chain. Thus, the probability of exploiting consumers becomes negligible.
• The product features, quality, and rate remain similar everywhere for perfectly competitive products. For example, the quality and rates of toothpaste in New York City or South Dakota remain almost the same, and consumers everywhere get standard products.
• In perfect competition, start-up costs, production, advertising, and marketing costs are very low. Hence, entering this market along with production, and sales get easy for the seller.

The following are the disadvantages of perfect competition: -

• The biggest disadvantage of perfect competition is the ideal market structure. It is just a hypothetical or theoretical concept of economics with negligible existence in the real world.
• Sellers cannot add value to their product because adding value or features does not increase prices fully determined and controlled by the demand and supply system. Hence, the cost to the seller increases, but revenue remains the same. Ultimately profit margin decreases. If sellers increase their prices for better products, consumers may switch to other sellers or consider other products.
• Heavy competition is another disadvantage for sellers due to low barriers and high freedom to entry and exit. I.e., anytime a new player can enter the market and start offering similar products or services to the consumer at similar rates.
• Existing sellers always have an advantage over new players because they are well established in the market, and have already created goodwill among suppliers and consumers, and are located at prime locations. But new sellers have to struggle and sometimes incur losses and are ultimately thrown out of the market.

A monopoly is a popular market structure referred to understand perfect competition better. However, it is theoretically opposed to perfect competition, characterized by a single product seller with no close substitutes. Monopoly provides full power over prices, and consumers cannot shift to another seller in case of a price rise because there might be no other option available. High barriers to entry and exit result in a negligible competition. E.g., Intel in the microprocessor industry has a 90% market share.

Let us compare the key characteristics of perfect competition and monopoly.

This article is a guide to what is Perfect Competition. We explain it with examples, its features, differences with monopoly, advantages & disadvantages. Also, we discussed perfect competition market structure, advantages, and disadvantages. You may learn more about it from the following articles: -

• Examples of Monopoly
• Monopolistic Competition Examples
• Perfect vs Monopolistic Competition
• Monopoly vs Monopolistic Competition