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Unit 10: Market Structure – Perfect Competition

10.5 Perfect Competition: Existence in Real World Notes

We have already discussed the features of perfect competition, but let’s summarise them once
again. These are the conditions that must be present in an industry with perfect competition:

1. All firms sell an identical product.

2. All firms are price-takers.
3. All firms have a relatively small market share.

4. Buyers know the nature of the product being sold and the prices charged by each fi rm.
5. The industry is characterised by freedom of entry and exit.

The above five requirements rarely co-exist in any one industry. Therefore it can be said that
perfect competition is rarely (if ever) practiced in the real world. Most of the products available
in the market have some degree of differentiation.

Example: Let’s take an example of bottled water. Producers vary in the methodology
of purifi cation, product size, brand identity, etc. Besides Commodities such as raw agricultural
products, though they differ in terms of quality, are almost alike. When a product does come to
have zero distinction or differentiation, its industry is usually consolidated into a small number
of large firms, or an oligopoly.

There are many barriers to entry which restrict firms from entering several industries. Factors
such as, high startup costs (as seen in the auto manufacturing industry) or strict government

regulations (as seen in the utilities industry) limit the ability of firms to enter and exit such
industries. With the advancement in technology and media education, though consumer
awareness has increased, there there are still few industries where the buyer remains unaware of
all available products and prices.

Thus, it can be said that there are significant obstacles preventing perfect competition from

appearing in today’s economy. The agricultural industry probably comes closest to exhibiting
perfect competition. This is owing to many small producers with virtually no ability to alter the
selling price of their products due to market regulation and pricing policies. The commercial
buyers of agricultural commodities are generally very well communicated. Agricultural
production involves some barriers to entry, but it is not difficult to enter the marketplace as a

producer.

Caselet The Stock Market

he stock market is very close to a perfect competitive market. The price of a stock
usually is determined by the market forces of demand and supply of the stock and
Tindividual buyers and sellers of the stock have little effect on price (they are price-
takers). Resources are mobile as stock is bought and sold frequently. Information about

prices and quantities is readily available. Funds flow into stocks and resources fl ow into
uses in which the rate of return. Thus stock prices provide the signal for effi cient allocation
of investment in the economy. However, imperfections occur here also though the stock
market is very close to a perfect competition, for example, sale of huge amount of stocks by
a large corporation will certainly affect (depress) the price of its stocks.

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