In economic terms, perfect competition means that buyers and sellers co-exist and participate in trade with full knowledge of the market price, and each considers the product offered to be exactly equivalent to that of any other competitor.
It is a hypothetical market where there are a large number of sellers and buyers. A homogeneous product is sold and its price is determined by the forces of supply and demand.
This type of economic scenario rarely occurs because suppliers compete to be different from each other, not totally equivalent, and customers do not usually bother to investigate the range of options available to them.
In addition, each negotiation is surrounded by other “transactions”: the decision to target one market rather than another, the bundling of opportunities, the perception of a brand, etc.
A good example of a perfect competition situation is a fresh fish market on a quay where many people visit. Each fish is equivalent and it does not matter which vendor you buy from.
All the sellers are close to each other so they know the price of each fish stall.
Even customers can see the price of each business and they make a decision in favour of their needs.
How realistic is the market of perfect competition?
Very few markets or industries in the real world are perfectly competitive.
For example, how homogeneous is the production of companies, given that even smaller companies working in manufacturing or services try to differentiate their product.
Numerous experiments have shown that decision-making is often far from what could be described as perfectly rational.
Decision-making can be biased and subject to general ‘guidance’ when consumers and producers are faced with complex situations.
Although unrealistic, it is still a useful model in two respects:
First, many primary and commodity markets, such as coffee and tea, have many of the characteristics of perfect competition, such as the number of individual producers that exist and their inability to influence the market price.
Secondly, for other manufacturing and service markets, the model is a useful criterion by which economists and regulators can assess the levels of competition that exist in real markets.
Characteristics of Perfect Competition
This depends on 5 characteristics:
It has a large number of small buyers and sellers
In this type of market there are a large number of small buyers, where the demand of one person is only a small fraction of the total market demand.
And just as the number of sellers is also large, so the offer from an individual trader is only a small fraction of the market offer.
Due to the large number of buyers and sellers, their market supply and demand remains constant so that their curve will be a straight horizontal line.
It offers a homogeneous product or service
In the market of perfect competition each seller (or company) offers a homogeneous product, that is, each unit of the product will be identical in shape, size, colour and in all aspects.
In short, commercials are selling basically the same products. Think for example of sugar sellers or someone selling a share of a particular company’s stock.
You have knowledge of the perfect competition
All buyers and sellers are fully aware that a homogeneous product is sold on the market and therefore producers cannot exploit their buyers.
In addition, people can easily find out what the current prices are and can let people know what they want to buy or sell, based on whatever the value is.
Freedom to enter or leave the competition
This means that both buyers and sellers can easily enter or leave the market.
When a salesperson enters a market of perfect competition, he finds himself with two aspects to take into account:
- What happens if you enter the perfect competition in a short period of time? This time is not enough for a new company to enter the market and too short for an existing company to exit.
- And what happens in a competition that has a long period of time? Here there is enough time for a new company to enter the market and for an existing company to exit.
There are no additional costs
If a buyer buys a commodity from one seller, rather than the other, no extra cost is included.
The normal benefit is the opportunity cost of running the business – the amount that the seller could do in some other line of work.
Perfect competition occurs when there are many buyers and sellers of a well-defined product.
Nowadays there are many quite competitive markets, for example: why do pizzerias tend to sell pizza at more or less the same price, even if they choose what price to put on their menus?
This is because the sale of pizza is an almost perfectly competitive industry, with very defined costs and profits.
It is clear that the more competition, the more demand. That is why it is important to have tools such as a CRM to help us manage each sale we make, in a versatile and effective way.
Before you leave, you knew that Efficy is by far the most adaptable CRM on the market.
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