Classification of Market > Based on Competition - Perfect Competition

Perfect competition is an ideal or imaginary form of market. It describes a market where there are many buyers and many sellers, all selling identical products, and no one can influence the price.
Each buyer and seller is very small compared to the whole market, so they must accept the market price. They are called price takers.

• According to Mrs Joan Robinson, "Perfect competition prevails when the demand for the output of each producer is perfectly elastic."
• "Perfect competition is characterised by the presence of many firms. All of them sell identical products. The seller is the price taker." – Bilas
• "Perfect competition prevails when the demand for the output of each producer is perfectly elastic." – Mrs Joan Robinson
• "Perfect competition describes a market in which there is a complete absence of direct competition among economic groups." – Ferguson

These are the main features of a perfectly competitive market:

1] Very large number of buyers and sellers

• There are so many buyers and sellers that each one’s share is very small in total market demand or supply.
• No single buyer or seller can change the market price. Everyone accepts the same price (price takers).

2] Homogeneous (identical) product

• All firms sell the same type of product in terms of quality, size, colour, and design.
• Because products are identical, buyers are indifferent between sellers; each firm’s product is a perfect substitute for another.

3] Free entry and exit of firms

• Firms are free to enter the industry when they expect profits and leave when they incur losses.
• There are no legal, social, or strong financial barriers to entry or exit.

4] Single uniform price

• A single market price is determined by total demand and total supply of the industry.
• All firms sell at this same price; they cannot charge more (they lose buyers) or less (they earn less profit).

5] Perfect knowledge of the market

• Buyers know the market price and quality available from all sellers.
• Sellers know about the prices of inputs, technology, and demand conditions.
• Because of this perfect information, no one can cheat others by charging a higher price or hiding information.

6] Perfect mobility of factors of production

• Factors like labour and capital can move freely from one firm or industry to another and from one region to another.
• This helps to keep costs and profits similar across firms in the long run.

7] Absence of transport cost (assumption)

• It is assumed that there are no transport costs, or they are the same for all firms.
• So, the product can be sold at the same price everywhere, and location does not create price differences.

8] No government intervention (laissez-faire)

• There is no government control on price, output, or entry of firms in this model.
• Price and quantity are decided only by demand and supply in the market.

9] No selling costs (no advertising)

• Firms do not spend on advertising or sales promotion.
• Because products are identical and buyers already have full knowledge, advertising gives no extra advantage.

10] Profit maximisation as main goal

• Every firm aims to maximise profit, usually by producing the output where its marginal cost equals marginal revenue (price).
• Even though each firm focuses on profit, the model shows that this competition can lead to efficient use of resources for the whole economy.

Economists use two related terms: pure competition and perfect competition.

(A) Pure competition

Pure competition exists when these three conditions are satisfied:

1. Large number of buyers and sellers.
2. Homogeneous product.
3. Free entry and exit of firms.

In pure competition, these conditions remove monopoly power, but some other assumptions (perfect knowledge, no transport cost, etc.) may not hold fully.

(B) Perfect competition

Perfect competition is a wider and stricter concept.
It includes the three conditions of pure competition plus these extra conditions:

1. Perfect knowledge of market conditions.
2. Perfect mobility of factors of production.
3. Absence of selling costs.
4. Absence of transport costs.

• Perfect competition is an ideal market where many buyers and sellers trade identical products, and no one can control price.
• Firms and buyers are price takers; the price is fixed by industry demand and supply.
• Pure competition needs 3 conditions (large numbers, homogeneous product, free entry/exit).
• Perfect competition needs 7 conditions (3 basic + perfect knowledge, factor mobility, no selling costs, no transport costs).
• The model is used as a benchmark to judge how efficient other markets are.