Question

As a manager of a big retail shop that specialises in groceries operating in South Africa, you don’t believe that the industry players are fairly contacting themselves despite the argument from the competition tribunal and parliament that the sector is competitive and is operating freely and fairly. Using relevant examples and your knowledge of market structures, write a critique of the theory of perfect competition and reasons why this market structure might not exist in real world.   

Answer 1

Perfect competition involves number of buyers and sellers large enough so that none of them has any influence on the market price or the market quantity. Each of the firm operating under the competitive market has zero degree of market power. This indicates that it has to accept the market price to sell its product. This is a critical assumption because there are very few market in the real world where sellers have no market power. Only agricultural sector is considered to be a competitive market where is farmer has negligible market share and has no influence on the price.

Another criticism of perfect competition is that buyers and sellers have perfect information about the product being sold. In the real world sellers have more information about the product and the buyers and this leads to asymmetric information and related problems. Perfect competition also assumes that individual firm makes economic profit in the long run. There are markets in the real world where firms continue to earn economic profit even in the long run. Their pricing and quantity decision are dependent on the decision taken by the Rivals. It is given that the manager operates a big retail shop. We can consider the market to be Imperfect because in perfect competition all firms are of a given size. All these reasons indicate that perfect competition does not exist in the real world.