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Perfect Competition or Competitive Markets

by / Published in Economics

A perfectly competitive market structure is one where there are potentially infinite numbers of buyers and sellers. What this ensures is that no single seller, single buyer or a group may dictate the commodity price. Each participant therefore is a “price taker”. All buyers have the willingness and ability to pay a specific price; likewise, all producers have the ability to produce or supply the given product at a specific price (Petri, 2004).


Another characteristic of competitive markets is that it is extremely easy to enter or exit such a perfectly-competitive market: there are zero entry barriers or exit barriers. The factors of production are perfectly mobile in a larger time frame allowing adjustments. Such markets are also characterized by conditions of perfect information: all consumers and producers are perfectly aware of quality, associated price and production methods. There are no associated transaction costs involved here when goods are exchanged. There are no differences in the product or services offered across suppliers, ensuring homogeneity.

Profit Maximization

As far as profit maximization is concerned, in a perfectly-competitive market, firms sell to ensure the most profit, which is where marginal costs meet marginal revenue. The setup is such that the number of firms operational cannot go down. This is ensured by prohibiting increasing returns to scale (or economies of scale). Lastly, property rights are well established; what goes in the sale and rights acquired after a purchase.
In the short term, there is no productive efficiency because when marginal cost is equal to the marginal revenue, however allocative efficiency is there (since marginal cost = marginal revenue). The demand curve in this case for a firm is perfectly elastic. A big difference when compared to a monopoly (or an oligopoly) is that a firm cannot, in these conditions, turn economic profit. Therefore it can only cover production costs.
The market structure has a unique role in cases where the government wants to not intervene in a sector or where it is impossible to serve or sell without crowd-sourcing. It is used as a vehicle to implement free competition. Street food market in developing countries is a relevant example, though because of the strict conditions imposed, there are no ideal examples of perfect competition. There are no entry or exit barriers, there is considerable mobility because buyers can move to another food seller in the vicinity, homogenous products etc.

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