Perfect Competition Meaning
It is a market structure in which there are numerous sellers, selling a product that is largely the same. Having said this, it is important to note that perfect competition is a market construct or a theoretical concept, the existence of which in real life rarely exists. But this helps in understanding markets with large number of sellers selling similar products. For example, the market for pulses, soaps, detergents etc.
Characteristics of Perfect Competition
The main features that define a perfect competition are:
- It has a large number of sellers and buyers. Sellers are selling identical/ homogeneous products. As a result of this no single firm can influence the price of a commodity. If any seller would try to reduce the price, to gain market share, other sellers would follow suit and thus prices are at their minimum, (equal to Average Total Cost). With this, sellers become price takers and they aren’t able to influence the market price.
- Sellers are not too large in size, such that they aren’t able to influence the market.
- There are no barriers to entry or exit for the sellers
- Buyers have complete knowledge about the product and pricing
- Since for all practical purposes, firms are identical (selling same product at same price), capital resources and labour is completely mobile across sellers.
- In a perfect competition, firms might earn some profit in the short run, but in the long run, it will have zero economic profits.
Market structures depend on the number of buyers, sellers and level of product differentiation. Theoretically, perfect competition is the opposite of Monopoly, in which there is only one seller selling a product and has the ability to influence its market price. Other types of market structures include an Oligopoly, where there are a handful of sellers selling broadly the same and provide similar benefit to consumers, for example the automobile manufacturing sector in the US and Monopolistic markets where there are large number of firms, selling slightly differentiated product, such that the benefit that the consumer gains from them differs to some extent but the products are nevertheless close substitutes. Barriers to entry and exit and also low in monopolistic markets. An example of monopolistic markets would be that of soaps or face washes, where though the products have similar functionality, but may differ depending on skin type, thus providing different benefits to the consumers.