Question

The market structure of perfect competition has a lot of ideal qualities–hence the name perfect. For example, perfectly competitive firms are productively efficient, and perfectly competitive markets are allocatively efficient. It is, however, difficult to find many examples of perfectly competition in the real world. Perfect competition is really a benchmark against which we compare other market structures in the real world.

How much actual competition occurs in perfectly competitive markets? Some make the claim that there is actually no competition between firms in a perfectly competitive market.

Do you agree or disagree with this claim? What is your reasoning?

Answer 1

The claim that there is no competition between firms in perfectly competitive market structure in true and let's understand why it is true.

Let's understand what does it mean when we say there is competition between firms. When we say that two firms are competing it means that firms are try to capture the larger share of consumer base by offering lower price or by offering a slightly different product to consumer.

And in order to offer lower price the firms must lower their cost of production only then they can charge lower price. And in order to lower their cost of production they must produce efficiently. If the firms are already producing at a efficient scale there is no more scope of becoming more efficient.

Now let's consider different product to consumers. The firms competing in the same industry starts to offer the same products with slight modification in order to attract more consumers towards their products. Product differentiation is another way of competing in market.

Now we have understood what does competition between firms means in a market. Let's now focus on the perfectly competitive market structure and see whether firms can compete or not.

The perfectly competitive market structure is defined as the market structure where there are many sellers of identical good and many buyers. The number of seller are so high such that the share of individual supplier in the market supply is negligible as a result individual suppliers has to supply at given market price and the individual supplier can't influence the market supply nor the market price. The product sold by each supplier is identical and there is no scope of product differentiation.

The price is set equal to the Average variable cost which in turn equal to marginal cost of production which means there is no more scope reducing the price as the price is already at minimum and at any price below AVC firms will start to make losses.

As you can see that in perfectly competitive market structure the firms are bound to charge the same price for same product which is being sold by many sellers and there is no scope of product differentiation. So the claim that firms can't really compete in perfectly competitive market structure.