The coaching centers in India were enraged by recent advertisements by a major Edtech company giving 95% discounts to students enrolling at its Kota centers. The coaching centers claimed that Edtech corporations are breaking Indian competition regulations and engaging in unethical marketing and advertising tactics, including luring away teachers and students with steep wage increases and huge discounts on courses. This is making the competition imperfect.
In theory, perfect competition exists when all businesses sell the same goods, market share has no bearing on prices, businesses can enter or quit the market without any obstacles, consumers have perfect or complete information, and businesses cannot set prices.
What Is a Perfect Competition?
Perfect competition is a standard or ideal kind to which actual market structures can be compared. Theoretically, monopolies are when only one company provides a good or service. That company is free to set its own prices because consumers have no other options, and potential competitors can’t enter the market, which is the opposite of perfect competition.
In reality, perfect competition cannot possibly exist. It, however, serves as a baseline for comparison with other market structure types, such as oligopoly, monopoly, duopoly, and so on.
What Are the Characteristics of Perfect Competition?
Homogenous products
Many buyers and sellers in a market are perfectly competitive. Instead of giant corporations that may regulate prices through changes in supply, the sellers are smaller businesses. There aren’t many distinctions in the capabilities, features, and prices of the things they sell. This ensures that consumers cannot differentiate between products based on tangible qualities, such as size or color, or intangible qualities, such as branding.
In this market, plenty of buyers and sellers ensure that supply and demand are stable. Customers can readily switch out products made by one company for those made by another.
Price takers
In perfect competition, no company has the authority to charge more than the market price, which is the same as the marginal cost of production. The other businesses will undercut any company charging a higher price. Since long-term market demand is consistent, all producers have about equal market shares.
Profitability
While some businesses may have short-term gains that are quicker to market, in the long-run equilibrium of fully competitive markets, no business will ever experience a financial gain. The demand curve is lowered by new producers joining the market, and no company can raise prices to maintain profits.
Free entry
Businesses can easily enter and leave a perfectly competitive market. This can come in the form of money, time, or knowledge. For instance, a significant upfront investment is needed in the oil and gas sector. As a result, competitors face a barrier to entry. These expenses don’t exist or are very little in perfect competition.
Additionally, under ideal competition, businesses might easily abandon the market. A company might, as an example, have a lengthy contract. They cannot, however, abandon the market without incurring high fees.
Rational buyers
In this hypothetical market, buyers make logical decisions to maximize their economic utility and shop around for the best deal. Additionally, these customers are well informed about the goods they are buying. Thus, they are aware of the pricing ranges offered by various businesses.
Mobile Resources
In perfect competition, the labor force and the capital can move around as needed or desired at no additional expense.
Government Regulation
Governments play a crucial role in developing the market for goods by enforcing rules and regulating prices. By establishing guidelines for the market’s operation, they can regulate the entry and exit of businesses. For instance, the creation, manufacture, and sale of medications are subject to several regulations the pharmaceutical sector must follow.
In a perfectly competitive market, such controls don’t exist. Since there are no limits on a company’s entry or exit from such a market, it can freely invest in labor and capital assets and alter the output in response to market needs.
Examples of Perfect Competition and Imperfect Competition
Agriculture sector
An agricultural market may be the closest example of ideal competition in real life. Small producers charge relatively similar pricing for almost equivalent products. The market as a whole is unaffected by the entry and exit of some vendors, and prices and product details are transparent and largely consistent.
Foreign exchange
Traders exchange currency in this market. Since there is only one Indian Rupee (INR), the product is uniform. The market has a large number of buyers and sellers as well. Additionally, it is simple to purchase currency and simple to sell it as well. That said, there is a caveat that traders could not have “precise information.” Regular buyers and sellers can be disadvantaged compared to expert traders who do it for a livelihood. Even so, it is one of the most exact representations of perfect competition that we can currently uncover.
Airline industry
India already has six airlines, one or possibly too many. Economic theory predicts that either all would lose money or, even if some do, the returns will be small compared to the initial investment. As a result, it serves as an illustration of perfect competition.
Central government for military equipment
India’s central government purchases most of its military equipment. Even though several producers may be supplying these products, the prices that each supplier is ready to accept are determined by what the government is willing to pay. This competition is not perfect either.
Automobile sector
Although the auto financing industry first seems quite competitive, many consumers lack the opportunity to get precise price information. Auto financing is different from typical markets because the pricing is not transparent and ultimately depends on the borrower’s creditworthiness and the specifics of the auto loan. In this market, auto dealers represent both consumers and lenders. Even after accounting for variables like credit worthiness, prices consumers pay for auto loans vary greatly due to the market’s asymmetric information. As a result, it is imperfect competition.
Monopoly in Coal
By enabling commercial mining to bring about competition, transparency, and private sector involvement in 2020, FM Sitharaman eliminated the monopoly on coal. Previously, bids for coal blocks could only be made by captive consumers with end-use ownership. With the liberalization of entrance standards, any party can now offer a bid and sell it on the open market. This way, the coal market competition was made less imperfect.
Key Takeaways
Profits might be attainable for a short while in markets with perfect competition. The market dynamics, however, neutralize the impact of either positive or negative earnings and move them toward equilibrium. Theoretically, a market with perfect competition is not monopolistic. All real markets can be considered imperfect since they all occur outside the plane of the perfect competition model when a market deviates from the idealized principles of neoclassical pure or perfect competition.
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