Competition in the market is a natural consequence when two or more businesses operate in a particular segment. Each business implements strategies, such as reducing prices of their products or giving additional products on each purchase to allure more customers, which helps a company expand. While profits gained by a single enterprise are great for that company, they can be significantly problematic to the competitors. Moreover, it can also result in a company gaining control over the market, creating a monopoly. For these reasons, a theoretical market structure was introduced known as the perfect competition.
What is Perfect Competition?
A majority of the time, the word ‘perfect’ does not always translate to the perfect condition of a system; however, in economics, it does. Perfect competition is a theoretical economic situation that arises when a market is shared equally among many competitors; however, each company sells an identical product. Moreover, the market share of each company in a specific market segment is equal as well, therefore, it does not influence the price of competitors, meaning there is no monopoly. In addition to these characteristics, customers have complete information about the product. Lastly, firms are free to enter or exit the market at any time. Interestingly, the idea of perfect competition originated in the late 19th century by Marie-Esprit-Léon Walras, a French mathematical economist. Following this, Kenneth Arrow, an American economist, and Gérard Debreu, a French economist, formalized it in the 1950s. Despite it seeming like the ideal market structure, there are certain drawbacks of perfect competition. Firstly, it hinders innovation, as each company is selling their product at an identical price and customers are barely able to distinguish between brands, opting to innovate will only result in exhaustion of resources without profits. Secondly, with equal profit shares, companies cannot grow their business beyond a certain point.
Examples of Perfect Competition
1. Crop Industry
While the prices of crops fluctuate significantly based on the yield of the crop in developing countries, it remains constant throughout the board in developed nations, as they have resources to grow the same amount of crop each year. Take the United States, for example, the price of wheat set by each company is identical, meaning consumers can quickly switch between different brands. Additionally, farmers are paid the same price for the crop, making it easier to enter the market.
2. Dairy Industry
Similar to crops, dairy is another industry that has similar prices for products throughout the range. Interestingly, local dairy farmers that sell directly to the customer can fluctuate the price of their products based on the output; however, the companies that produce dairy products offer nearly the same price annually. Additionally, consumers are unable to distinguish among brands in this category, as milk, for example, is bought solely because of the requirement, therefore, consumers purchase whatever brand is available at a given time. Besides, supermarkets actively change dairy farmers. While the product is different, consumers are unbothered by it.
Although it may seem like each supermarket is different from another with sales and different offers, ultimately, their primary business is to sell various products under one roof. The products stocked by supermarkets are produced by different companies, meaning each supermarket is selling the same product at a similar price, excluding the sales. Another aspect that makes supermarkets a perfect competition is their offering of non-branded products, which again are sold at nearly a similar price.
4. Foreign Exchange
Foreign exchange is a great example of perfect competition because a single entity cannot control the market, and each person is offering the same product. Granted, the value of currencies fluctuates even on a minute basis, but this fluctuation is the same for each individual. Moreover, entering and existing foreign exchange is easy as well.
5. Online Shopping
In present times, there is hardly anyone that does not shop online. It is convenient, plus it allows the consumers to compare products thoroughly providing them with critical information that is required for the final purchasing decision, which is not possible with physical stores. Moreover, you can always save certain products to purchase later on. Not a single eCommerce shop can dominate the market because of competition. Also, similar to supermarkets, the prices of products are within a similar price bracket.