Perfect competition in a market means that none of the agents can influence the price of the good or service, that is, both sellers and buyers are price-acceptors.
It is a market in which there are a large number of producers of a very homogeneous merchandise, where the demand curve is perfectly elastic and the market price (or equilibrium) arises from the law of supply and demand .
When we talk about perfect competition we mean an almost ideal and unlikely economic situation in reality,
However, this model is very useful in the study of certain markets that can approach perfect competition. Thus, there are few sectors that can be considered totally or perfectly competitive.
We can find some markets similar to the perfect competition in the agricultural sector, in the world of auctions or, to a lesser extent, in the market of raw materials.
Characteristics of the perfect competition
Among the conditions for perfect competition are:
- Free concurrence
Companies with perfect competition are “price-acceptors.” That is, there is a large number of companies and none have the capacity to influence the price, causing an idyllic situation in which the well-being of all participants is maximized.
- Homogeneous product
Perfect competition demands the need for a homogeneous product that is not very differentiable among competitors.
We would be talking, therefore, of a perfectly competitive market where buyers will choose the product of any of the bidders.
- Perfect information
For a homogeneous product to exist, it is vital that the information on prices and products is perfect. In other words, the data must be transparent and clear.
In addition, transaction costs and resource mobility costs are negligible. Thus, consumers can access any producer.
- Absence of entry or exit barriers
The absence of entry barriers or exit barriers in an environment of perfect competition must be virtually nil. That is, anyone can enter the business if they wish, or leave it, without this entailing a large deployment of resources.
Apart from the conditions described so far, there must be a basic reality: All these companies work with the idea of maximizing their profit or well-being. When this occurs, there is a market equilibrium where the supply of products equals the demand for them.
