Competition does not exist in a perfectly competitive market . The name is a bit of a misnomer because it seems to suggest there is competition. The competition only exists insofar as each participant is on equal ground in the market. Simply put, each participant is as competitive as the...
Competition does not exist in a perfectly competitive market. The name is a bit of a misnomer because it seems to suggest there is competition. The competition only exists insofar as each participant is on equal ground in the market. Simply put, each participant is as competitive as the others. This equality across the market effectively eliminates any real competition in the market.
Perfect competitive markets are rare and even where they do exist often fluctuate to other market styles. Four basic parameters are need to create a perfectly competitive market. There needs to be a large number of suppliers, little or no entry/exit costs, standardized products, and suppliers cannot influence the market. Just by looking at these qualifiers it is easy to see this severely limits potential markets because even small retailers want to distinguish their products.
The classic example of a perfectly competitive market is an agricultural market, especially on the micro scale as seen in local farm markets. Using a farm market the criteria can be easily observed. There tend to be multiple suppliers. The size can depend on the area, and in global markets there are usually too many suppliers to quantify. The first parameter is set.
All products will be the same. An ear of corn does not change from one supplier to the next. The quality of the products may differ, but generally the quality will be about the same for all products. A drought will affect each supplier about the same. If one supplier is able to overcome the drought and provide a superior product, then the market is no longer perfectly competitive. However, for the most part the products will be similar, satisfying criteria number two.
The entry cost for suppliers is almost non-existent. There may be small fees to set up a business and grow the product, but it does not require large scale operating capital or equipment. The agricultural realm has no exit costs either. To exit the market the supplier simply does not plant seeds or can enter a different sub-market (carrots instead of corn).
The final piece of the puzzle is the limitation of suppliers to influence the market. The standardized price becomes the norm for the market and is generally very near the minimum profit mark. If a supplier wants to lower the price of their product, it may be purchased more quickly, but the supplier will suffer from reduced profit, which is not rational. Even if the supplier acts irrationally, the price across the market would soon devolve to the lower price, forcing the supplier to either maintain the new price or continue the cycle until the market is destroyed or they lose money. Similarly, a supplier cannot raise the price because consumers can just buy the product cheaper elsewhere. This checks-and-balances model ensures the model maintains price equilibrium.
It is clearly seen that the perfectly competitive market does not contain true competition because of the balance observed in the system. Any attempt to act outside rational choice will result in the destabilization of the market and/or organization. Since the goal of organizations is to make a profit, they tend to operate on a rational basis, which bolsters the market stability.