Question

In an essay format

•What are the advantages and disadvantages of competitive markets?

Answer 1

Perfect competition is a market structure where there are many sellers and buyers in the market selling homogeneous product which results in the price of product being discovered by equilibrium between seller’s supply of product and consumers demand for product. Let’s look at some of the advantages and disadvantages of perfect competition –

Advantages of Perfect Competition

1. First and foremost advantage of perfect competition is that chances of consumer exploitation is very low in case of this type of market structure because in perfect competition sellers do not have any monopoly pricing power and hence they cannot influence the price of product or charge higher than normal price from consumers.
2. Another advantage of perfect competition is that consumer get standardized product irrespective of the place of purchase of product, so for example if a consumer is living in city A and he or she travels to city B and he or she requires soap which normally has perfect competition then consumer does not have to worry about quality of product because product will remain same whether consumer purchase it from city A or city B.
3. Perfect competition is consumer oriented market implying that consumer is king in case of this type of market structure and sellers cannot displease the consumer because consumer will quickly shift from one seller to another, hence as far as consumers are concerned perfect competition market structure gives them pleasure of shifting from one seller to another if they are not satisfied from the product or sellers services.
4. Another advantage of perfect competition is that it has very little or no advertisement expense because products are homogeneous and if firm keeps the price as decided by market forces then sales will automatically happen without company incurring huge publicity and advertisement expense.
5. Disadvantages of Perfect Competition
6. The biggest disadvantage of this type of market structure is that there is no incentive for sellers to innovate or add more features to the product because in case of perfect competition profit margin is fixed and seller cannot charge higher than normal price which is prevailing in the market because consumer will move to other sellers hence sellers keep selling standardized product at price fixed by market forces of demand and supply
7. Another disadvantage of perfect competition is that there are very little barriers to entry implying that any firm can enter the market and start selling the product, hence old firms cannot afford to be complacent because chances of losing market share to new firms always loom over them.
8. In case of perfect competition firm which has the best location is likely to generate more sales then firm which is not located on prime location and hence location playing its part rather than customer service of seller or product features is a limitation in perfect competition.

9. As one can see from the above that perfect competition has both advantages and disadvantages, however in real life this type of market structure seldom exists because all products cannot be homogeneous and there is slight difference even between perfect homogeneous products which give sellers opportunity to charge differential price from customers, hence in real world perfect competition is rarely found.