Describe the conditions necessary for perfect competition to exist. 

1 Answer | Add Yours

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

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.

We’ve answered 319,189 questions. We can answer yours, too.

Ask a question