What is a Perfect Competition Market?

Market analysisA Pure or Perfect Competition Market is a theoretical model of a market scenario comprising a large number of buyers and sellers who buy and sell homogenous (same quality) products at the same prevailing price in market. Thus, ideally in this situation there is no rivalry among competitors regarding prices, resources or consumers. They all sell a single product at a single price. This type of market acts as a benchmark to compare other existing markets to. While one extreme is a perfect competition market, the other extreme is a monopoly market condition where in a product is produced by one firm only and the firm can charge whatever price it deems worthy of their product. No one can question the price and no one can offer an alternative.

Features of Perfect Competition Market

  • Large number of buyers and sellers so that no individual can affect the price of the commodity
  • The product by all sellers is same in quality
  • The seller can enter or exit the market at any time free of cost
  • Transportation cost is absent as it will lead to difference in prices of a commodity
  • Advertising cost is zero
  • Consumers have 100% knowledge of product and market conditions and changes in these conditions
  • Production factors like labour, machinery, capital etc. have complete mobility in market without any hindrances
  • Each firm earns normal profits and no firm earns abnormal profits i.e. all sellers are at the same level
  • No firm can influence the price of the commodity. They simply accept the prevailing market price
  • There are no government interventions or any artificial restrictions.

Perfect competition sounds quite good in theory but it is almost impossible to achieve. No firm that has to accept the prevailing price at a loss will enter the competition.

Disadvantages of Perfect Competition Market

  • There is an absence of innovation as every seller sells the same product without any distinguishing feature
  • Due to perfect information flow, there are no or minimal marginal profits to firms as anyone can replicate the procedure
  • There will not be distinction of economies based on scale, as the firms will not have enough profits to further invest in expansion processes and thus all be on the same level

Perfect competition does not exist in the real world mainly because the product itself is different, be it on the basis of production, quality, marketing techniques or selling. Products even differ according to target audiences. As the product changes, the rest of the market is bound to change and thus removing the possibility of a perfect competition market. Though some features of perfect competition might seem to be developing now in the market, a completely perfect market cannot be obtained.