Perfect competition market vs Imperfect Competition

perfect competition market

Perfect Competition

What Is the Perfect Competition?

The term perfect competition is referring to a theoretical market structure. In a perfect competition model, with no monopolies. This is a type of structure has a number of key characteristics, including

  • All the companies are selling an identical product (in this case the product is a commodity or homogeneous).
  • All companies are price takers (they don’t have the influence to change the market price of their products).
  • The market share doesn't influence prices.
  • Customers are having complete or perfect information (in the past, in the present, and the future) about products sold and the prices charged by each company.
  • Capital resources and labour are perfectly mobile.
  • companies can enter or exit the market at no cost.

This can be contrasted with more realistic imperfect competition, which exists whenever a market, hypothetically or for real, violates the abstract principle of neoclassical pure or perfect competition.

Since all real markets exist outside of the plane of the perfect competition model, every market can be categorized as imperfect. The contemporary theory of imperfect V.S perfect competition comes from the Cambridge tradition of post-classical economic thought.

Perfect Competition

How Perfect Competition Works

Perfect competition is a point of reference or perfect ideal type to which real-life market structures might be compared. Perfect competition is theoretically the opposition of a monopoly, in which only a single company or corporation supplies goods or services and that corporation can charge whatever price it wants since customers have no alternatives and it is hard for the competitors to enter the marketplace.

Homogeneous Markets

There are a huge amount of customers and vendors in a perfectly competitive market. The vendors are small companies, instead of large corporations capable of analyzing prices using supply adjustments. They sell products with minimal differences in capabilities, features, and pricing. This guarantees that customers cannot differentiate between products based on physical features, such as size or colour, or intangible values, such as branding or brand price.

A large number of people both buyers and merchants ensures that supply and market remain constant in this market. As such, buyers can easily replace products made by one company for another.

Perfect Information Availability  

Details about an enterprise's ecosystem and competition constitute a significant advantage. For example, understanding component sourcing and supplier pricing can make or break the market for certain firms. In specific knowledge and research-intensive enterprises, such as pharmaceuticals and technology, data about patents and research enterprises at competitors can help firms develop competitive strategies and build a moat around their products.

The availability of free and equal knowledge in a perfectly competitive market guarantees that each firm can create its goods or assistance at identically the same speed and with the same production methods as another one in the market.

Absence of Controls  

Governments is playing a critical role in market creation for products by setting regulations and price management. They can contain the entry and exit of companies into a market by selecting rules to operate in the market. For example, the pharmaceutical industry has to compete with a roster of rules pertaining to the product, development, and sale of drugs.

In turn, these regulations require big capital acquisitions in the form of workers, such as lawyers and quality assurance, and infrastructure, such as machinery to manufacture medicines. The cumulative costs add up and make it overly expensive for enterprises to get a drug to the market.

In comparison, the technology industry functions with relatively less management and supervision as compared to its pharma counterpart. Thus, entrepreneurs in this industry can start businesses with less to zero finances, making it easy for people (individuals) to start a business in the industry.

Such commands do not exist in a completely competitive market. The entry and exit of companies in such a market are unregulated, and this liberates them up to spend on labour and capital assets without conditions and adjust their output in relation to market demands.

Cheap and Efficient Transportation

Cheap and efficient transport is another aspect of perfect competition. In this type of market, businesses do not incur significant costs to transport goods. This helps lower the product’s price and trims back delays in transporting goods.

Imperfect Competition

What Is the Imperfect Competition?

Imperfect competition lives whenever a market, hypothetical or real, violates the abstract tenets of neoclassical perfect competition. In this environment, companies are selling different products and services, setting their own unique prices, fighting for market share, and are often covered by barriers to access and exit.

Understanding Imperfect Competition

The Perfect competition is a bunch of assumptions in microeconomics used to form the theories of consumer and producer behaviour, supply and demand, and market price resolution mathematically tractable so that they might be specially illustrated and described. In interest economics and involved economics for public policy, it is also occasionally operated as a benchmark to estimate the strength and efficiency of real-world markets.

In a perfect competition environment, the following criteria must be met:

  • Businesses sell similar products with no product differentiation
  • The market consists of a big enough number of customers and vendors so that no business can impact the price it demands and buyers alone set the expense they are willing to spend each firm
  • All market participants and potential participants have free and ideal knowledge about past, current, and future requirements, affections, and technologies
  • All transactions can be brought out with zero costs
  • Companies can join or exit the market without incurring any costs

It is instantly apparent that very few companies in the real world work this way, bar maybe a few exceptions, such as sellers at a flea market or farmer’s market. If and when the forces detailed above are not met, competition is said to be poor—it is labelled this way because differentiation outcomes in certain businesses gain a benefit over others, allowing them to generate higher profit than peers, occasionally at the expense of consumers.

Imperfect competition makes chances to generate more profit, unlike in perfect competition conditions, where companies earn just enough to stay afloat.

In imperfect competition circumstances, businesses sell different products and services, set their own unique prices, fight for market share, and are often shielded by barriers to entry and exit, creating it harder for new businesses to challenge them. Imperfect competitive markets are overall and can be found in the following types of market systems: monopolies, oligopolies, monopolistic competition, monopsonies, and oligopsonies.

History of Imperfect Competition

The theory of perfect competition models in economics, along with modern concepts of monopoly, was established by the French mathematician Augustin Cournot in the book he wrote in 1838, Researches Into the Mathematical Principles of the Theory of Wealth. His thoughts were adopted and popularized by the Swiss economist Leon Walras, believed by many to be the founder of modern mathematical economics.

Prior to Walras and Cournot, mathematicians had a challenging time modelling economic associations or creating reliable equations. The new perfect competition model simplified economic competition to a purely predictive and static condition. This avoided many situations that exist in real markets, such as imperfect human understanding, barriers to entry, and monopolies.

The mathematical approach earned widespread academic acceptance, particularly in England. Any variation from the new model of perfect competitor was believed a troublesome violation of the new economic understanding.

Neoclassical macroeconomists in the 19th and 20th centuries claimed to be able to show mathematically that perfectly competitive markets could expand economic efficiency and social

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Anne Foster

About author
Anne Foster is one the best analytics and statistics makers, She's a vegan, Dog lover and believing in science. Working as Digital advertising Specialist since 2010.

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