1. Market describtion
Before to describe perfect competition market, when we look at web site of www.businessdictionary.com for the describtion of market, we need to be comprehensive of the general meaning of market. Market is a place where the demand and the supply come together and where the buyers and sellers make transaction by exchanging to goods, services, or contracts or instruments for money or barter. We can say for the market that buyers and sellers can take place physically at a bazaar, and also in our day, virtually where do not see each other during trade by developed technology for communication and network devices like phones, internet, fax, television, etc. (OKTAY,2010)
2. What about the perfect competition market?
The competition for actors in the market are at the level of utmost perfect condition. The advantage of perfect condition is that consumers will get the best benefits for their demands. However, the perfect market is a theorotical and is not able to be complete each level of its characteristics for world market totally. (GUNCAVDI,2012)
3. What are the characteristics of perfect competition?
The following points are indicating summarized but important characteristics about perfectly competitive markets: (TELSER,1987)
i. Mobilization of knowledge: The knowledge receives to the players in the market without wrong information included and time lags. For participants, it’s free to get to know information without taking any risk, even at the lowest level.
ii. Perfect information: Buyers and sellers have no limit to reach to perfect information about prices in all markets. For instance, when the a farmer will take the vegetables to the market where the prices at max level, and the consumer will get the information and reaches the goods (becuase of its mobilization) at the market where the prices are the lowest, without paying any cent. So at the end, the prices will become equal in all markets essentially.
iii. Freedom of entry and exit: For all actors in the market, it is the best market to entry into or exit out of the market; because there are not any restrictions or barriers on this occasion. Buyers, sellers, goods and services, also production factors are able to be in or not.
iv. Homogeneity for products: It means that all units of supplied goods or service have to have the same quality, nature and identification. By this way, the goods or service are very capable to be substituted.
v. Price takers: None of firms are able to get control of the market situations or the price levels. Each player has already accepted the prices which are accepted in the market thoroughly. The price takers have not enough power to set the prices, therefore they are taking the prices from the whole industry. Any of one single firm are not allowed to increase the price level freely, that might be caused to not sell any of items in the market.
vi. Many sellers: In the market, you can find very many firms, but it comes with dificulties to record every single statistics about each players. Main reason is because of no barreirs to enter the market.
vii. Not necessary government decisions: As of the knowledge is perfect, it is not necessary for government to be involved market mechanism in order to provide regulations into it.
viii. No transaction costs: The transaction cost is zero in order to reach the information to produce. In a perfect market, the buyers and the sellers do not get involved in transaction costs to trade goods or services through externatities. The third parties are not in the field to get comission or benefits from the knowledge transaction.
4. The reasons of failure of perfect competition
If the above conditions come together for the market, we would have the perfect competition in our world, but unfortunately, it’s not easy to establish a very well-organized links in terms of above points for the perfect market. For a purely competitive market, the barriers are always on the way of this aim. So, why is it not able to set a perfect competition? Here are below considerable points as some of demerits to not able to reach the perfect competition in a market. (WHITING,2016)
i. Competition Between Sellers: Many sellers in the market are in competition to show their companies’ powers explicitly by enforcing control over the huge amount of goods and services against other sellers.
ii. The Lack of Research and Development: As of the products are homogeneous in the market, there will be no R&D activities by a entrepreneur in order to improve its all products for better condition to win the competition against other competitors’ or producers’ products.
iii. Unbalanced Prices: The prices in pure competitive market are under control and effected by the price mechanism. For example, the main target of each entrepreneur is profit maximization that can cause fast increase on prices in the market. The buyers are also price-takers and so, with unstable income, this issue can cause a demand disturbances in the market as a failure.
iv. Demand Changes: As of buyers behaviour that is demand to own goods or services in all competitor markets, the demand will be affected abnormally by buyers as being free to buy.
v. Imperfect Information: The buyers are not always receiving the reliable and perfect knowledge from the realistic market. Persuasive promoting and directions can effect consumers decisions.
vi. Supplier Power: The producer companies may like to gain control over the amount of services and goods which they provide to market in order to show their market power.
vii. Scarcity Issue: As of very well known information for an economy, the resources such as capital, raw materials, labour force, etc. are scarce and this problem can cause a failure for homogeneous production in perfect competition market. (BLOCK,2015)
In the real world, perfectly competitive market is more likely theoretical than practical. It’s kind of utopic model to apply in the real world economies. Above strict criterias of perfect competition are not appropriate market model in our real world markets, due to in real world, suppliers’ profit maximization aim and consumers’ behaviours under the law of marginal utility are not able to be adaptable. On this occasion, related to perfect competition market theory as of the most part of authorities had reached conclusion, each part of perfect competition could not be sustainable and constant with the conditions among real world economies. By some of described failures for the perfect competiton market, economies – even it’s developed – will face the failure in any circumstances as long as that economies begin to establish businesses with other economies.
TELSER, Lester. (1987). “A Theory of Efficient Cooperation and Competition”, Cambridge: Cambridge University Press.
BLOCK, Walter. (Summer 2005). “Perfect Competition: A Case of Market Failure” Corporate Ownership and Control, Volume 2, Issue 4.
OKTAY, Nuvit. (2010). “Monopol, Oligopol ve Tam Rekabet Piyasaları “, Retrieved from http://enm.blogcu.com/monopol-oligopol-ve-tam-rekabet-piyasalari/9358390
DEBREU, Gerard. (1972). “Theory of Value: An Axiomatic Analysis of Economic Equilibrium”, Connecticut: Yale University Press.
GUNCAVDI, Oner. (2012). “Yönetim Bilişim Sistemleri”, Yönetim Ekonomisi Ders Notları.
WHITING,Brianna. (2016). “Perfect Competition: Definition, Characteristics & Examples”, Retrieved from http://study.com/academy/lesson/perfect-competition-definition-characteristics-examples.html#transcriptHeader