Describe the conditions necessary for perfect competition to exist. 

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kipling2448's profile pic

kipling2448 | (Level 3) Educator Emeritus

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The basic model of "perfect competition" includes a range of conditions, including comparability of product (i.e., the items being marketed must be identical or near-identical). The consumer or buyer (in the case of wholesalers) must have sufficient information on each seller to make a reasoned decision. There must be an absence of obstacles into and out of the market. There must be multiple sellers (obviously more than one and, preferably, more than two). Basic laws of supply and demand must exist without external influences such as government intervention in the marketplace, and there must be equitable conditions among competitors with respect to ancillary factors such as transportation and labor costs.

In theory, "perfect competition" exists when the above conditions are met. In the real world in which businesses operate, a state of perfect competition rarely, if ever, exists, especially in the era of globalization. Free trade agreements between countries with disparate economies can warp the playing field, as labor costs and regulatory structures eliminate the notion of equitable operating conditions among competitors. That is why so many businesses, especially manufacturers, move operations to regions or countries where the cost of production is lower. The constant effort to attain a competitive advantage precludes the development of a state of perfect competition.

It could be argued that, once upon a time, the American automotive industry enjoyed a state of perfect competition. The so-called "Big Three" automakers (General Motors, Ford, and Chrysler) enjoyed overwhelming shares of the market, at least in the family and low-end vehicle markets. At the luxury car level, foreign competition, such as from German automakers Mercedes Benz and BMW, could be considered to have influenced that upper-scale market, but the Big Three competed for the American market largely unimpeded. They all employed workers represented by the same union, all maintained their main facilities in Michigan, and all operated under the same government-imposed regulatory structure. Their troubles began when the oil crises of the 1970s radically increased demand for smaller, more energy-efficient cars than they were producing. The result was the rise of the Japanese automotive companies Toyota and Datsun/Nissan, as well as Honda. Today, Korean (Kia) cars are ubiquitous as well as those from Japan, Germany, Sweden, and the Big Three. As competition among automotive companies increased, the playing field became more and more complicated, with each country having its own laws and regulations and costs of production.

While the model of "perfect competition" no longer exists (if it ever truly did), it remains useful for analyzing economies and markets.

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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There are a number of conditions that must exist in order for a market to be in perfect competition.  In the real world, it is practically impossible for all of these conditions to exist at once.

First, the firms must all be selling an identical product.  The product must be so homogeneous that buyers will absolutely not care what firm they buy from.  Therefore, the buyers will not care about brand names or anything like that as all firms will be interchangeable.

Second, there must be very low barriers to entry.  There must be no laws that prevent new companies from entering the market.  There must not be any serious amounts of money needed to enter the market so essentially anyone who wants to can enter. 

Third, there must be no barriers to exit.  If a firm wants to get out of the market it must be able to do so easily.

Fourth, there has to be perfect knowledge.  All the firms have to know and be able to use all the production techniques that their competitors use.  All of the buyers need to know what prices all of the firms are offering.  Everything must be completely transparent.

Finally, there must be a large number of small companies present in the market.  The market cannot be dominated by one company or by a small number of companies.