A perfectly competitive market is beneficial to the buyers as it reduces monopoly in the business. The consumers are well-informed about the price of the goods. This discourages high prices and offers equal opportunity to all. The market share does not influence the prices in a perfectly competitive market. While it is attractive, this model is theoretical. Let’s tell you the definition and characteristics of a perfectly competitive market.
What is a Perfectly Competitive Market
A perfectly competitive market refers to a theoretical market structure where both sellers and buyers are price-takers. It means that the producer or the consumer does not affect the market price of goods. The prices are independent of their decisions, eliminating monopoly. All firms in such a setting are price takers and sell identical products. However, the perfect competition model is theoretical, and all markets are imperfect.
Characteristics of a Perfectly Competitive Market
The perfect competition market has a large number of producers and consumers. The producers make sure to maintain a steady supply of goods in the market. The products are quite similar to each other in features and pricing. It makes it difficult for the buyers to differentiate between the quality of different products. As the quality of the product is same, no seller proposes exaggerated prices.
The products in a perfectly competitive market are the same in features and selling points. They are indistinguishable from the average consumers. The customers can easily switch to other sellers due to negligible differences in the quality. One such example is buying a regular commodity, such as buying bread from a market where everyone sells bread.
The consumers of a perfect competition market have all the information about a business. They are aware of the prices in the market, the quality of the product, and its weak points. This kind of information is also known as “perfect information.” It enables them to move to another producer that offers the same product in a better way. Complete information is not much possible in imperfect markets.
A perfectly competitive market does not spend a lot on transporting the goods to minimize the price. Cheap transport enables the producers and retailers to provide products to the buyers at the decided price without fluctuation.
Standardized Product Prices
All the products in a perfectly competitive market are standardized. They are equivalent with the same properties process. Standardizing the products ensures that the price of the service or goods stays the same. It allows the consumers to buy products at a fixed price to avoid monopoly in the business.
Equal Market Share
Different competitors in a business cannot compete on the price. They have a similar market share. You cannot reduce prices to attract more customers or increase prices to make more profits. When a business increases or decreases the price to benefit itself, it encourages others in the craft to do the same. It disturbs the perfectly competitive dynamics. Thus, a perfectly competitive market does not have varying shares.
No Entry or Exit Barriers
In a perfectly competitive market, firms can enter and exit the market without any restrictions. Common restrictions in an imperfect market include start-up costs, government regulations, and patent issues. These barriers are negligible in a perfectly competitive market.
Does a Perfectly Competitive Market Exist
The Perfectly Competitive Market theory does not exist in real life as all producers cannot have the same product. It is used as a standard to understand how competitive the market is. The agricultural and dairy setups somehow come around the idea of a perfectly competitive market. People usually produce similar products making it similar to a perfectly competitive market.
The Bottom Line
A perfectly competitive market is a theoretical concept that acts as a benchmark for competition in the market. Perfect competition has a large market with people selling the same products at the same price. The producers and consumers in such a setup are both price-takers. It eliminates monopoly from the system. Unlike improper competitive markets, they also do not have any entry and exit barriers. Yet, competitive markets are ideal and ideal situations do not typically exist.
Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.