What Constitutes a Perfectly Competitive Market?
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Let’s say you were standing at the grocery aisle comparing prices. There are a lot of similar products with different prices. You could take the lowest option because it seems to be the best value for money. But what if all your options were the same?
What if every brand of pasta was produced in the same factory and tasted identically? In this case, pasta would be a perfectly competitive market. Let me explain myself further.
Define Perfectly Competitive Market
A fully competitive market is an economic concept that assumes that all goods are identical or homogenous. The following features define such a market:
- Producers do not have control over supply: They cannot produce less to increase prices significantly or produce more to lower them.
- Perfect information: Buyers and sellers know what price they would charge for their product across all markets from past to future time periods.
- No transaction costs: Products are bought via middlemen or additional fees, and buyers can switch suppliers freely.
- Rock-bottom pricing: Prices remain as low as possible due to perfect knowledge and resource mobility.
These conditions cannot be met in practice since issues like intermediaries or transportation expenses cannot be ignored completely hence all real-world markets are “imperfect”. Nevertheless, economists use the idea of a perfectly competitive market while building theoretical models.
Conversely, Monopolistic Market
Competitive markets are highly valued in modern economies and therefore laws exist against monopolization by firms. You must have heard about antitrust laws or seen government stop mergers for instance when Microsoft bundled Internet Explorer with Windows around 2000 hence limiting competition.
Is A Perfectly Competitive Market Desirable?
At first glance, competition looks good because it leads to better quality goods at lower prices. Businesses compete to provide improved or cheaper products while customers vote with their wallets. However, cutthroat competition is not good for everyone involved parties.Currently we live in an era of fierce competition.Let me make it clear, for instance, in a perfectly competitive market, firms have no profits because perfect knowledge lowers prices to marginal costs. Consequently, lack of profits discourages innovation since there is no incentive for making better products in this field. Ultimately all of them are similar or equal to one another.
Examples from the Real World
A completely competitive market does not exist anywhere on earth since perfect knowledge cannot be obtained. Although some markets come close. Take iPhone charging cords sold through Amazon. There are other options but they basically do the same thing; charge your iPhone. Dominance is typically determined by price with other cables having more reviews or unique features like different types of connectors or colors that distinguish them. Such differences contradict the requirements of fully competitive markets. The identical cables may also be less expensive in Hong Kong or China indicating ignorance among buyers.
In Conclusion
A perfectly competitive market would mean no innovation. Unless commercial incentives were present computers would not become faster and automobiles safer and more energy efficient.The absence of incentives for companies to compete for talent would lead to stagnant wages and fewer jobs.Such an environment would create a very mundane society.
However, the concept of a perfectly competitive market allows firms and economists to evaluate products or markets theoretically, without considering factors such as high initial costs or government controls. But then again, they are just intellectual exercises.
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