Question

Considering the effect of perfect competition on corporate profit, should companies avoid entering competitive markets?

Answer 1

A perfect competition market is one wherein there are numerous buyers and sellers in the market place, and the knowledge of each one is high enough that a single producer or a consumer cannot affect prices of goods and services being sold. The competition is to a level that profit margins are minimum as competing firms need to keep their prices as one and any new firm that enters the market place has to accept this price. However, such market types are only theoretical in their very existence and economists often argue that they do not exist in real life. The level of competition in these market means that in the long run, firms do not want to enter such market places as profits are negligible.

However, not all competitive markets are like perfect competition. There exist monopolistic competition market types, wherein even though the competition level is higher, the market is dominated by differentiated products wherein one company’s products differ from another and thus commands a better price and better customer relationship means more profits even when competition is higher. These market types are ideal for business owners that are dependent on innovation for excelling in the market place. For example, consider the market for mobile phones. Even though there is tough competition in the market yet Apple, Samsung or the likes of companies like One Plus and Xiaomi regularly compete with one another on the basis of quality of product and service being offered. Here, one firm earns better profits than other despite fierce competition in the market only because their product has some attributes or characteristics which their consumer prefers over others.

Thus, we can say that a perfect competition model is hypothetical in existence and in the real world, even though competition may be higher in some market types, it does not and should not be a reason for firms to enter these market types. This is because innovation and technological advancements will come to our aid in developing products that sell more and maintaining client relationship will be an added advantage for us.

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