What Is Perfect Competition? Learn About Its Features, Pros & Cons
by Shahnawaz Alam Marketing 15 September 2023
Perfect competition in the market is something against a monopolized market. Here, the demand and supply of a product determine the price of the same. All the products sold in the market are identical in quality, features, and price.
The buyers can always switch to another seller for their product or service needs. The market has low barriers and restrictions for new business owners to enter or exit. It is a market for different players to run their businesses because there are many buyers.
However, perfect competition is a hypothetical condition. Go through this article to learn more about perfect competition.
What Is Perfect Competition?
Perfect competition is an ideal market condition where the competition is at its peak. Such competition occurs when the companies spell identical and different products. Market shares do not influence the market competition.
Also, companies can exit or enter the market without any barrier stopping them. The buyers have the full information of products, and the determination of price is not under the companies’ control.
Perfect competition constitutes an ideal market condition where all the firms have a limited market share with zero power to influence it. However, one must note that it is an ideal market state that has no existence in the real world. Also, it is usually used as a benchmark to compare the real-world market with it.
On a simpler note, this type of market competition has the following conditions met –
- A large number of sellers and buyers are there.
- Every firm produces homogeneous products.
- Firms have free entry and exit.
- This market condition requires zero cost for advertising.
- Customers know the market well and are aware of the changes within. They are always indulging in making rational buying decisions deliberately.
- Different production-related factors (like labor, capital, etc.,) have a perfect level of mobility inside the market. There is no market factor to hinder these factors.
- The government does not intervene.
- There is no transport cost related to business.
- Each firm earns a normal level of business profit, with no firm surpassing ‘normal.’
- The firms take the price that the demand and supply process decides. The firms do not have the power to influence the market price.
A perfect condition arises when all aspects are met inside the market.
Features Of A Perfect Competition
Here are some of the common features of perfect competition –
The Market Is Large
One of the key features of perfect competition in the market is that the market is vast. It has a large population, and many buyers and sellers are in the market. Many buyers and sellers constantly keep the constancy of supply and demand consistent. Buyers can easily get substitutes for different firms they buy from, while the sellers also have large availability for buyers.
The Market Is Homogeneous
In perfect competition, the firms sell products that are homogeneous in quality. They do not provide different products in quality and type, and the buyer has no preference. Because of a homogeneous market, the buyer cannot differentiate between two products. So, they cannot choose a product based on its qualities.
To Enter Or Exit The Market Wilfully
Another feature of perfect competition is that the firms do not have to spend excessive or outstanding startup costs. The startup cost here is low, while the product demand is high.
So, entering or exiting the market whenever a business owner wants is not difficult.
However, even under such an ideal market, when a business incurs losses because of heavy competition and wants to exit, it can do so for free. This is when other firms can enter the market and take their place.
Easily Available Information
Sellers do not have to struggle to get information on the market. They can easily access information related to technological requirements, available supply levels, and marketing tactics. Also, the buyers in a perfect competition market are aware of the product information, features, types, quality, and the like. So, it is highly unlikely that either party can manipulate the market for their own benefit.
Pros & Cons Of Perfect Competition In The Market
Although this is a very ideal situation, perfect competition in the market has some cons. No ideal situation is perfect for either the sellers or the buyers.
Here are the different pros and cons of perfect competition –
- It is a theoretical and ideal condition in the market.
- The perfectly competitive market situation is focused on the consumers, not the sellers. Here, the consumer is the king, and they have complete market information. They always have different substitutes available for their needs. They can easily switch the sellers and the products in a competitive market.
- There is no chance of having a monopoly over a market for the sellers. Because there are always substitutes available. So, they do not control the price of products or services. It only depends on the demand and supply cycle. So, sellers do not have any chance to inform their customers.
- The product quality, features, and pricing are similar in a homogenous market with perfect competition. As an example, the price for a product is the same across different states in the US.
- In perfect competition, startup expenses, production, promotion, and advertising expenses are very low. It is easy for the sellers to enter or exit the market.
- The biggest drawback of perfect competition is that this is a hypothetical situation where the market structure is competitive.
- The price is fully determined and driven by the demand and supply chain. Hence, the sellers cannot add value to their products. It will not change the product prices.
- Due to the low barrier to entering the market and high freedom of exit, the market competition is high. This limits any seller’s share of profit to a normal level.
- Existing sellers in the market always have an advantage over the new sellers entering the market. New sellers have to suffer some losses initially and struggle to get a stake in the market.
Perfect competition in a market provides no room for competition for the sellers. It is an ideal condition that provides an opportunity against a market that can create a monopoly. It is a market that simultaneously sells similar products. However, such a market condition has different pros and cons. One of them is that sellers have very limited scope to have a large market share.
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