Question

• Fully explain what that characteristic means and what its importance is to classifying a market as perfectly competitive.
  • If you have noticed this characteristic in a certain market, explain where you have seen it before or provide your own example.
• Would you see the characteristic you are discussing in any of the other three market structures - monopolistic competition, oligopoly or monopoly?
  • Why or why not?

Answer 1

In a perfectly competitive market, there are multiple firms.This means that a firm can enter and exit the market freely. The products firms produce are identical. This means that every firm is creating the exact same product. One firm cannot control the market or its conditions.

PERFECTLY COMPETITIVE MARKET:

Definition: Perfect competition describes a market structure where competition is at its greatest possible level. To make it more clear, a market which exhibits the following characteristics in its structure is said to show perfect competition. Large number of buyers and sellers.

Perfectly competitive market is a market where businesses offer an identical product and where entry and exit in and out of the market is easy because there are no barriers. In the example from earlier, when starting your own business in a perfectly competitive market, you would need to sell a product that is identical to the products that other businesses are selling so that you can enter the market more easily.

CHARACTERISTICS:

Let's look at a list of characteristics that are often found with a perfectly competitive market:

1. In a perfectly competitive market, there are multiple firms.
2. Knowledge is available to everyone. Basically, for the new potential business owner from earlier, when entering a perfectly competitive market, all of the information is perfect, with no failure or time lags.
3. There are no barriers to enter the market. There are also no barriers to exit the market. This means that a firm can enter and exit the market freely.
4. The products firms produce are identical. This means that every firm is creating the exact same product.

One firm cannot control the market or its conditions. In other words, no firm has the power to influence the market and therefore the price received for products is the result of the whole industry.

In a perfect competition, every seller has the choice to enter or exit the industry. There are no barriers to their entry and exit. This characteristic ensures that there are no abnormal profits and losses in the long run. Lets us first understand what is meant by abnormal losses, abnormal profits and normal profits.

CHARACTERISTICS OF A PERFECTLY COMPETITIVE MARKET:

The characteristics of a perfectly competitive market include insignificant contributions from the producers, homogenous products, perfect information about products, no transaction costs, and no long-term economic profits.

1. Large Number of Buyers and Sellers:

The first condition is that the number of buyers and sellers must be so large that none of them individually is in a position to influence the price and output of the industry as a whole. In the market the position of a purchaser or a seller is just like a drop of water in an ocean.

2. Homogeneity of the Product:

Each firm should produce and sell a homogeneous product so that no buyer has any preference for the product of any individual seller over others. If goods will be homogeneous then price will also be uniform everywhere.

3. Free Entry and Exit of Firms:

The firm should be free to enter or leave the firm. If there is hope of profit the firm will enter in business and if there is profitability of loss, the firm will leave the business.

4. Perfect Knowledge of the Market:

Buyers and sellers must possess complete knowledge about the prices at which goods are being bought and sold and of the prices at which others are prepared to buy and sell. This will help in having uniformity in prices.

5. Perfect Mobility of the Factors of Production and Goods:

There should be perfect mobility of goods and factors between industries. Goods should be free to move to those places where they can fetch the highest price.

6. Absence of Price Control:

There should be complete openness in buying and selling of goods. Here prices are liable to change freely in response to demand and supply conditions.

7. Perfect Competition among Buyers and Sellers:

In this purchasers and sellers have got complete freedom for bargaining, no restrictions in charging more or demanding less, competition feeling must be present there.

8. Absence of Transport Cost:

There must be absence of transport cost. In having less or negligible transport cost will help complete market in maintaining uniformity in price.

9. One Price of the Commodity:

There is always one price of the commodity available in the market.

10. Independent Relationship between Buyers and Sellers:

There should not be any attachment between sellers and purchasers in the market. Here, the seller should not show prick and choose method in accepting the price of the commodity. If we will see from the close we will find that in real life “Perfect Competition is a pure myth.”

Economic market structures can be grouped into four categories: perfect competition, monopolistic competition, oligopoly, and monopoly.

The most obvious difference is in the number of firms involved. In an oligopoly only a few firms are in the market. By contrast, many small firms are involved in monopolistic competition. ... The main similarity is in the kinds of products firms in these two market structures produce.

Oligopoly is a market structure containing a small number of relatively large firms, with significant barriers to entry of other firms. Monopolistic competition is a market structure containing a large number of relatively small firms, with relative freedom.

A monopoly and an oligopoly are market structures that exist when there is imperfect competition. A monopoly is when a single company produces goods with no close substitute, while an oligopoly is when a small number of relatively large companies produce similar, but slightly different goods. In both cases, significant barriers to entry prevent other enterprises from competing.

Examples of Monopolies and Oligopolies:

A company with a new or innovative product or service enjoys a monopoly until competitors emerge. Sometimes these new products are protected by law. For example, pharmaceutical companies in the U.S. are granted 20 years of exclusivity on new drugs.7 This is necessary due to the time and capital required to develop and bring new drugs to market. Without this protected status, firms would not be able to realize a return on their investment, and potentially beneficial research would be stifled.

Gas and electric utilities are also granted monopolies. However, these utilities are heavily regulated by state public utility commissions. Rates are often controlled, along with any rate increases the company may pass onto consumers.

Oligopolies exist throughout the business world. A handful of companies control the market for mass media and entertainment. Some of the big names include The Walt Disney Company (DIS), ViacomCBS (VIAC) and Comcast (CMCSA). In the music business, Universal Music Group, Sony Entertainment and Warner Music Group all have a tight grip on the market.