INTRODUCTION : In economic theory, perfect competition (sometimes called pure competition)

describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction-type markets, say for commodities or some financial assets, may approximate the concept. As a Pareto efficient allocation of economic resources, perfect competition serves as a natural benchmark against which to contrast other market structures.

Though there is no actual perfectly competitive market in the real world, a number of approximations exist: Perhaps the closest thing to a perfectly competitive market would be a large auction of identical goods with all potential buyers and sellers present. By design, a stock exchange resembles this, not as a complete description (for no markets may satisfy all requirements of the model) but as an approximation. The flaw in considering the stock exchange as an example of Perfect Competition is the fact that large institutional investors (e.g. investment banks) may solely influence the market price. This, of course, violates the condition that "no one seller can influence market price". Horse betting is also quite a close approximation. When placing bets, consumers can just look down the line to see who is offering the best odds, and so no one bookie can offer worse odds than those being offered by the market as a whole, since consumers will just go to another bookie. This makes the bookies price-takers. Furthermore, the product on offer is very homogeneous, with the only differences between individual bets being the pay-off and the horse. Of course, there are not an infinite amount of bookies, and some barriers to entry exist, such as a license and the capital required to set up.

CONTENT : There Is (Almost) No Such Thing As

Perfect Competition
Neo-classicalists argue that the market will naturally come to an equilibrium known as perfect competition. In this ideal utopia everything will be perfect. Consumers get the lowest price, workers get a fair wage and businesses earn only normal profits. No one is ripped off or exploited because no such nasty things occur. There is no poverty, unemployment, inflation or recessions. There is no need for government to intervene or even exist. While it does describe agriculture, it is completely irrelevant to the rest of the economy. It is a conservatives dream, more like Narnia than the real world. Despite being taught in all textbooks and described as the economy without government interference, it is instead a deeply flawed theory. It is based upon 5 unrealistic assumptions that do not reflect the actual economy. The 5 assumptions of perfect competition (as stated in textbooks) are: There are a large number of buyers and sellers in the industry and all have such a small market share that they cannot influence the market. This means every firm and consumer is a price taker. 2. All goods are identical (homogenous) 3. There are no barriers to entrance or exit of the market. 4. Consumers have perfect information. 5. All firms have equal access to resources and technology and there is constant or decreasing returns to scale 1. Due to the their tiny market share all buyers and sellers are price takers This is the most crucial assumption of perfect competition; it is also the easiest one to disprove. In order for perfect competition to work there must be an enormous number of companies, perhaps numbering in the hundreds. Think 1.

for a moment, what industry is actually like this? What industry is comprised of hundreds of sellers equally small and insignificant? The only case where this applies is in agriculture. There are hundreds of carrot farmers for example, each with next to no market power. They sell to consumers with equally little market power, so in this case perfect competition does apply. However even this is being disrupted by the growth of massive agri-businesses in America who would have large market power. Likewise supermarket chains are using their market power to push down the price they pay farmers. In no other industry are there numerous firms, rather there are a small few. It is daft that so important a theory can be so easily rebuked simply by using your eyes. 2. All goods are identical The theory requires that all goods be identical and considered identical. This way firms are only competing on price, so if one firm decreases its price then consumers will instantly flock to it. While this applies to agriculture and carrots, it doesnt elsewhere. Firms actively try to differentiate their goods from others. This is done by either creating subtle differences or acting as though there are genuine differences. For example, manufacturers go to great lengths to prove their razor is different and better than the competitions. Or look at the vast number of different car models, each one slightly different from the next so that it is not possible to compete solely on price. This assumption ignores the fact that many companies actively compete based upon their products quality. The food industry is based upon similar food being served different ways so that restaurants compete more on quality than on price. 3. There are no barriers to entry or exit According to the theory if firms in the industry are earning large profits then this will attract new firms to enter the market. Firms will keep entering the market until the profit is reduced to a normal level (though it is never stated what this is or means).However there are barriers to entrance in almost all industries. Some of them are official limits on the number of entrants such as in medical and legal professions. However more commonly it is large set up costs that prevent new firms from entering an industry. For example there are only two Irish airlines (as opposed to hundreds) because there are enormous start up expenses involved in buying aircraft. While this may be the most obvious case, almost all industries involve set up expenses such as the purchase of equipment and buildings. These actively debar firms from expanding into new industries and are a major limit on the number of firms. It is also assumed that firms do not try to prevent new entrants by either colluding or reducing their prices in the short run to drive the new entrant bust. 1. 4. Consumers have perfect information It is assumed that all consumers know everything there is to know. So if one firm lowers its price then consumers will find out very quickly. Consumers are assumed to have the knowledge to compare all businesses and pick the best one. Consumers are assumed to be able to distinguish quality differences between goods. If one firm sought to gain an advantage by charging a lower price but selling a lower quality good, they would be quickly found out. Needless to say, consumers do not know everything and can quite often be fooled by the market. For example advertising convinces people that two goods that are fundamentally the same are actually different. In some cases it convinces consumers that they should buy the inferior good. Consumers can and often are ignorant of the finer points of the goods they are buying (think cars) or may not be aware of which firm is selling the cheapest good or the best quality. 5. All firms have equal access to resources and technology and there is constant or decreasing returns to scale The theory has other flawed assumptions that assume that all firms are on an equal level. Thus it is not possible for one firm to invent or adapt a new technology before its rivals; rather technology comes from an unknown source and is distributed simultaneously and equally. Likewise it is assumed that all firms use the same resources in identical ways, no firm may become more efficient than any others. Most importantly it is assumed there is no such thing as economies of scale. Seeing as this is the heart of the Industrial Revolution and capitalism itself this is absurd. If one firm did avail of economies of scale then it could sell goods at a lower price, increase its sales, which would allow it to become more efficient, allowing it to sell at a lower price, and so on until this firm dominated the market. Therefore for perfect competition to work there must be no economies of scale and instead have an industry full of mini cottage factories.

It is also assumed that there is no brand loyalty, that consumers will ditch their usual firm when it suits them. The theory assumes there is no advertising to convince people to buy a certain good they wouldnt have otherwise bought. There are no transportation costs and all firms have equal access to the same markets so there is no local advantage. Perfect competition exists in a world where time stands still. There is no development of industry through increasing efficiency or new inventions. Firms do not save or invest in the future. If a firm makes a loss it goes bankrupt, without trying to weather the storm. It is a world where the word profit isnt mentioned and treated like the sex during Victorian times, it has to happen but everyone pretends it doesnt. Perfect competition is the ideal of all conservatives and is the bedrock of neo-classical economics. Unfortunately it exists almost nowhere (agriculture is the only exception). It is a theory that exists only in the minds of its admirers and in the textbooks. It is nowhere to be found where it counts, in the real world. The economy is being compared to a fantasy. Perfect competition, like all dreams of perfection, should be acknowledged for what it is, a dream not the reality.
Real world market structures (especially oligopoly and monopolistic competition), all of which fall short of the idealized characteristics of perfect competition, can then be compared against the perfectly competitive benchmark. The fun part of economic analysis is then to see how and where particular industries fall short and the degree to which each of these specific characteristics contribute to the lack of efficiency.

Consider Phil the zucchini grower. As one of gadzillions of zucchini growers, each producing identical zucchinis, Phil would seem to be operating in a perfectly competitive industry. But is he... really?

First, consider the large number of growers characteristic. While there are gadzillions of zucchini growers, Phil does not compete with every zucchini grower in the nation. Because zucchinis are perishable and costly to transport, Phil's market is likely confined to his hometown of Shady Valley. In this case, he might be one of only a few hundred zucchini producers. Being one of a few hundred provides significantly more market control that being one of gadzillions. Second, consider the identical product characteristic. If Phil provides "service with a smile" and offers only the plumpest, juiciest, ripest zucchinis for sale, then buyers might prefer to buy Phil's zucchinis over those of other zucchini growers. In the view of the buyers, Phil's zucchinis are not identical to the other zucchinis in the Shady Valley zucchini market. Third, consider the perfect resource mobility characteristic. While Phil can easily exit the Shady Valley zucchini market by not planting any more zucchinis, there are barriers to entering the market. In particular, a zucchini grower needs a chunk of land upon which to grow zucchinis. While most homeowners in Shady Valley could easily clear a plot by the back fence, landless apartment dwellers or the homeless lack this opportunity. The cost of entering the zucchini market might be low, but it is not zero. Fourth, consider the perfect knowledge characteristic. A lot of folks are completely clueless when it comes to growing zucchinis. Are the seeds planted by a full moon in March? How far apart are the seeds planted? Do zucchinis grow on trees? Is it necessary to irrigate? How much and what kind of fertilizer is added? Are zucchinis harvested (or picked) when they are green, or yellow, or some other color? Moreover, what is the going price of zucchinis? Is it really $2.50? So many questions, so few answers. And certainly not perfect knowledge.

CONCLUSION : Perfect competition is an idealized market structure that does NOT exist in the real
world. While some real world industries might come relatively close to one or two of the four key characteristics of perfect competition, none matches all four sufficiently that they can be declared PERFECTLY competitively. Some industries come close on the large number of small firms and the identical product characteristics. A few industries have relatively good, although not perfect,

information about prices and technology. However, almost all industries fall far short of the perfect mobility characteristics. Perfect competition is NOT intended as a description of real world industries. It is designed as a idealized benchmark that can be used to evaluate real world industries. The extremely restrictive characteristics that make up perfect competition (perfect "this" and perfect "that") create a market structure that efficiently allocated resources. If the real world economy was actually populated by nothing but perfect competition, then resources would be efficiently allocated. It would not be possible to reallocate resources in any way that would generate any greatersatisfaction of wants and needs.

BIBLIOGRPAHY :

1.

^ Mas-Colell, Andreu; Whinston, Michael D.; Green, Jerry R. (1995). Microeconomic Theory. Oxford University Press, New York and Oxford. p. 315. ISBN 978-0-19-507340-9.

2. 3.

Jump up^ Steve Keen, Debunking Economics: The Naked Emperor of the Social Sciences, Pluto Press Australia, 2001 Jump up^ Robert J. Aumann, "Existence of Competitive Equilibria in Markets with a Continuum of Traders", Econometrica, V. 34, N. 1 (Jan. 1966): pp. 117

4. 5. 6. 7. 8. 9. 10.

Jump up^ K. Vela Velupillai, "Uncomputability and Undecidability in Economic Theory", Applied Mathematics and Computation (2009) Jump up^ Novshek and Sonnenschein (1987) Jump up^ Heinz D. Kurz and Neri Salvadori, Theory of Production: A Long-Period Analysis, Cambridge University Press, 1995 ^ Jump up to:a b c Frank (2008) 351. Jump up^ Profit equals (P ATC) Q. Jump up^ Smith (1987) 245. Jump up^ Perloff, J. (2009) p. 231.