Which of the following goods and services are the most likely to be produced in a perfectly competitive industry? Which are not? 1. Coca-Cola and Pepsi 2. Potatoes 3. Private physicians in your local community 4. Government bonds and corporate stocks 5. Taxicabs in Lima, Peru—a city that does not restrict entry or the prices drivers can charge 6. Oats.

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The "model of perfect competition" includes a list of requirements that must be met for a state of "perfect" (or "pure") competition to exist. The list expands or contracts according to various sources, but, in general, includes the following requirements:

  • Competing firms offer an identical, or nearly identical, product
  • The market operates according to capitalist, free market principles, meaning there is no impediment to competition and consumers enjoy equal access to competing firms' products
  • There are more than two competitors
  • Government involvement in the marketplace is limited or nonexistent
  • Outside variables that can influence prices are nonexistent

As noted, different sources list more requirements for a state of perfect competition, and there are variations in how these requirements are articulated, but the underlying principles remain consistent. A theoretical picture of perfect competition is presumed to exist when these requirements are met.

With this in mind, we can now examine the list of products provided in the question and make a determination on which product(s) most closely meet(s) the above requirements.

Because some sources suggest that agricultural products are most likely to meet the requirement for perfect competition, one would logically conclude that potatoes and oats best meet the requirements. This could be the case because there are many producers of potatoes around the world, including some of the largest (by territory and population) countries in the world, such as the United States and China. The problem with this conclusion, however, is the disparate economic structures that exist in the real world. China and the United States, two major trade partners, regularly conflict on matters of bilateral and multilateral trade--conflicts stemming primarily from cultural, historical, and structural distinctions between the two nations. Another major producer of potatoes, Russia, similarly brings to the table greatly complicating factors, including its political and economic systems. That said, potatoes, absent these real life considerations, could represent a theoretical example of perfect competition. There are multiple producers and suppliers, the market for these particular goods could, in theory, function in a completely open and minimally-regulated environment (unlikely, given controls on the trade in agricultural products that could involve the inadvertent transfer of dangerous bacteria or problematic insects), the market share available to each supplier could be limited due to the extent of competition, and the information available to consumers could be limited by governments or companies prone to evading what regulations may exist. Domestically, the U.S. potato market is dominated by two states, Idaho and Washington, with many other states also producing potatoes, albeit at much lower levels. Again, however, the model posits an unrealistic world, so we are forced to ignore such variables.

Oats, as with potatoes, are obviously agricultural products. Oats, as with potatoes, are available from multiple sources. A key difference, however, is the greater parity among states that produce oats. While Idaho and Washington dominate the domestic potato industry, several states dominate the domestic oat industry. North and South Dakota, Wisconsin, Minnesota, Pennsylvania, and Iowa all grow large numbers of potatoes. Oats are a...

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relatively simple item, with a lot of parity involved, and there is little the public wants to know about their production beyond the uses of pesticides in protecting crops from infestation. Suppliers share the market with a great deal of equality, and free market principles dominate.

In a sense, agricultural products, despite the suggestion that they represent the best option for perfect competition, also present the greatest obstacles. That is why some of the other options may present better representatives of perfect competition. Chief among these alternatives is #3, private physicians in your local community. These may exist in sufficient numbers, and function in a reasonably equitable manner, so as to qualify for the model of perfect competition. All are certified by the states in which they operate, and presumably provide the same services--in effect, that of family practitioners. Information on each is available to greater or lesser extents through their websites, the medical associations to which they belong, and publicly-available websites that provide information on complaints filed against each physician. Each is limited in scope to a generally geographically-defined clientele, and consumers enjoy freedom to switch physicians as they deem fit. Again, however, real-life considerations cannot be entirely ignored. In this case, the mitigating factor involves insurance companies. Patients do not, in practice, enjoy complete freedom to choose the physician they want; they are limited by those who participate in their individual insurance plans. That variable imposes serious limitations on the choice of private physicians.

The easiest option to consider is that involving the two main manufacturers of carbonated beverages, Coca-Cola and Pepsi. These are globally-known products that exist in a state of near-perfect competition. They are both known commodities, they are both widely available, consumers enjoy tremendous freedom of access to both, mainly through grocery stores (both are limited in terms of vending machine access and availability in restaurants; either one or the other is available), the two products are very similar, and both cost pretty much the same. The only real mitigating factor, under the model, is the fact that they are only two competitors and the model mandates more than two in competition. That factor, however, is of minimal importance when considering the environment in which this particular industry operates. Other cola products are often available (Shasta, for example), although Coke and Pepsi clearly dominate market share--a clear violation of the model's requirement with regard to numbers of firms involved. This is the main and, really, only violation of the model. Otherwise, the Coke versus Pepsi competition meets the model's requirements quite well.

Taxi cabs in Lima, Peru, is potentially the least applicable option of the bunch. Any traveler to Peru, as with many other major cities in so-called less-developed countries, must be very careful about the cab in which he or she is riding. While there are more than two competitors in Lima, they are far from equal, and public information on each company is almost always incomplete. Additionally, no model pertaining to competition can ignore the fact that taxi cabs are not (yet, anyway) autonomous mechanisms. Each is driven by a human being, and humans vary greatly in skill and temperament and, of particular importance, in the area of integrity. There is no way this option best meets the criteria for perfect competition.

Finally, and most problematically, is the final option: government bonds and corporate stocks. This particular option is difficult to assess because it is (A) unclear, and (B) prone to too many variables. It is unclear whether the question posits that bonds are in competition with stocks, or whether the option involves a different form of competition. For purposes of discussion, it will be assumed that bonds and stocks are in competition with each other, as, in real life, they are indeed competing investment options. As such, we safely conclude that this particular option fails the test miserably. While bonds are, in general, exceedingly low risk, with a great deal of information regarding the government in question widely available, stocks present an entirely other category of risk. This option easily passes the quantity test. There are many stocks from which to choose, and we don't know from the information provided in the question whether we are limited to only one government, or, conversely, whether bonds from additional governments can be considered. Bonds and stocks are so different, however, that the notion of perfect competition does not exist. Yes, consumers can purchase one or the other, or both. Bonds, however, are low-risk, low-reward investments; stocks involve considerable risk, but with higher potential rewards. A major factor, however, is the level of government involvement in this particular marketplace. Stock markets are heavily regulated to protect consumers and the integrity of the marketplace (and, by extension, the national economy), and no viable model can exclude that reality.

In conclusion, one can reasonably conclude that oats present the greatest potential for application of the model of perfect competition. They best meet the criteria. For the market domination of Coke and Pepsi, however, the competition between those two companies provides a very good example of free market competition.

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