Question

What use is the competitive model if no truly competitive firms exist?

Answer 1

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Abstract

As per competitive model, Belwo criteria must be met in order for a market to be considered perfectly competitive:

1. All firms sell an identical product
2. All firms are price-takers
3. All firms have a relatively small market share
4. Buyers know the nature of the product being sold and the prices charged by each firm
5. The industry is characterized by freedom of entry and exit

If we look at the real world scenario we will found the below observation that can void the concept of perfect competition that is explained in competitive model theory.

• Perfect competition is an abstract concept that occurs in economics textbooks, but not in the real world. That's because it's impossible to attain in real life.
• Theoretically, resources would be divided among companies equally and fairly in a market with perfect competition, and no monopoly would exist.
• When it comes to their bottom lines, companies typically make just enough profit to stay in business.
• No one business is more profitable than the next. That's because the dynamics in the market cause them to operate on an equal playing field, thereby canceling out any possible edge one may have over another.
• Since perfect competition is merely a theoretical concept, it is difficult to find a real-world example.

But there are instances in the market that may appear to have a perfectly competitive environment. A flea market or farmer's market are two examples.

Consider the stalls of four crafters or farmers in the market who sell the same products. This market environment is characterized by a small number of buyers and sellers.

There may be little to differentiate between the products each crafter or farmer sells, as well as their prices, which are typically set evenly among them.

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