Perfectly Competitive Market Meaning, Characteristics, & Examples

What is a perfectly competitive market?

Simply, a perfectly competitive market is a hypothetical market structure of many firms that sell homogeneous products.

Perfectly competitive market definition

A perfectly competitive market is a hypothetical market structure where a large number of buyers and sellers buy and sell the goods, and all of these buyers and sellers have the opportunity to get perfect information, all of these buyers and sellers work as price takers, buyers of the market take decisions rationally, there are no any entry and exit barriers in the market structure, no externalities, non-increasing returns to scale and homogenous products are sold in the market structure.

According to the above definition, we can identify several main characteristics of the perfect competition.

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Perfect Competition Graph in Short Run and Long Run

Examples of perfect competition

The perfect competition is a hypothetical and extreme situation, not a real-world situation. However, the following are some markets in the real world that are mostly closer to perfect competition.

Perfect competition example 1: Agricultural markets (Ex: wheat, corn, milk)

It is very easy to enter the wheat production industry. If producers cannot earn profits, they can easily switch to the corn production industry.

As mentioned in the monthly reports of the United States Department of Agriculture, a corn farmer in the USA received an average price of $6 per bushel in the year 2015. If a corn farmer sells one bushel for $7, that seller will not gain any buyers.

Many farmers sell milk to supermarkets. The milk of different firms are very similar to each other. So, consumers can buy milk from any buyer.

Perfect competition example 2 : Online goods and services selling markets (Ex: eBay, Amazon, AliExpress)

eBay is a very famous online goods-selling platform. This platform contains a large number of buyers and sellers. On this platform, consumers can search for the information that they need, and they can compare the products, and prices, of the different sellers. Also, buyers can check the previous reviews provided by buyers on the sellers. So, buyers buy the best product for their budget from the best seller. Because buyers can get full information, sellers have to compete with other sellers by giving better value to the buyers. As a result of this, eBay has become a perfectly competitive market with many sellers who sell homogeneous products.

Perfect competition example 3: Forex markets

Another example of a perfectly competitive market that sells homogeneous products is Foreign Exchange Market (FOREX market). Due to the similar currency kinds (US Dollar, British Pound, Euro, Australian Dollar) that are accepted on every transaction, the commodity is non-differentiated in other words homogeneous.

We will explain the main characteristics of the perfectly competitive market with the most related examples for the perfectly competitive market.

Perfectly competitive market characteristics

Perfectly competition characteristics 1: Similar products are sold by firms

Each firm in the market sells homogeneous products to the consumers. There is no significant difference between the products of the buyers. As a result of it, consumers can easily switch from one buyer to another buyer. Consumers do have not to bear any cost for that.

Examples: Milk industry, FOREX

As an example, many farmers sell milk to supermarkets. The milk of different firms are very similar to each other. So, consumers can buy milk from any buyer. Another example of a perfectly competitive market that sells homogeneous products is Foreign Exchange Market (FOREX market). Due to the similar currency kinds (US Dollar, British Pound, Euro, Australian Dollar) that are accepted on every transaction, the commodity is non-differentiated in other words homogeneous.

Perfectly competitive market characteristics 2: No entry and exit barriers

It is very easily entered and exits in perfectly competitive industries. As an example, there are no government regulations or there are very low start-up costs when entering the perfect competitive industries and there are no additional costs for the firms when shutting down.

Examples: Wheat production industry

As an example, it is very easy to enter the wheat production industry. If producers cannot earn profits, they can easily switch to the corn production industry.

Perfectly competitive market characteristics 3: There are many firms in the market.

Because of there are no entry barriers, we can see many firms in a perfectly competitive market structure. These producers sell the same products at the price determined by the market or industry. If one producing firm exits from the marketplace, consumers will not bear any loss. Because there are many other producers in the market.

Examples: Paper mills industry in Canada

The Paper Mills industry in Canada is a very good example of the perfectly competitive market structure that has many producers such as Cariboo, Winpak, Kruger Supremex, and Hood Packaging. These companies produce similar paper rolls. This industry is growing very fast and the market value is $ 6 billion.

Perfectly competitive market characteristics 4: Every firm has a similar market share

Since there are many firms in the market and every seller sells the same product to the market, every firm has a similar market share. Any buyer does not have a higher or lower market share.

Perfectly competitive market characteristics 5: Consumers can get full information

In a perfectly competitive market, buyers can get full information. They have true information about the price, quality, quantity, and so on. So, buyers always take rational decision that maximizes their satisfaction. Producers who sell low quality and low quantity of goods at higher prices cannot survive in the marketplace.

Examples: eBay

eBay is a very famous online goods-selling platform. This platform contains a large number of buyers and sellers. On this platform, consumers can search for the information that they need, and they can compare the products, and prices, of the different sellers. Also, buyers can check the previous reviews provided by buyers on the sellers. So, buyers buy the best product for their budget from the best seller. Because buyers can get full information, sellers have to compete with other sellers by giving better value to the buyers. As a result of this, eBay has become a perfectly competitive market with many sellers who sell homogeneous products.

Perfectly competitive market characteristics 6: No marketing campaign is required

because of the characteristics of the ability to get perfect information and the existence of rational buyers, there is no need for marketing in perfectly competitive firms. Because using marketing campaigns, producers can acknowledge buyers about the goods and services that producers sell. But in a perfectly competitive market structure, consumers have perfect information about goods and services already. So, there is no need the acknowledge these goods and services again. All the buyers in a perfectly competitive market act rationally. So, they act to maximize their utility. Marketing campaigns cannot influence the decisions of these rational buyers.

Perfectly competitive market characteristics 7: Firms are price takers

Price taker means a business firm that is not able to influence the market price by changing the quantity of supply. A firm that operates in a perfectly competitive market is a price taker. Because a perfectly competitive market has to accept the equilibrium market price and produce the quantity of supply that the firm needs. This equilibrium market price is decided by the total market supply and total market demand forces. An individual firm has no power to influence the market price. If a perfectly competitive firm increases its price more than the market price, this firm will lose a significant portion of its sales. Because any rational buyer does not need to pay a high price for identical products. Although a firm in perfect competition sells its products lower than the market equilibrium price, it will not get any more incentives.

Examples: Corn production industry

As mentioned in the monthly reports of the United States Department of Agriculture, a corn farmer in the USA received an average price of $6 per bushel in the year 2015. If a corn farmer sells one bushel for $7, that seller will not gain any buyers.

So, the demand curve of a perfectly competitive market can be presented as follows.

According to the above graph, market price is decided by the perfect competition market supply and market demand forces. In other words, market price is decided by the total market supply and total market demand. Market price is P1.

An individual perfect competitive firm has no power to influence the market price. It has to accept the P1 price. The demand curve of a perfectly competitive firm is perfectly elastic (a horizontal line). So, the firm can sell the quantity that it wishes at the given price level (P1).

What are four market structures?

There are four types of market structures based on the competition that prevails. They are, perfect competition, monopolistic competition, oligopoly, and monopoly. These market structures can be ranked from perfect competition to the monopoly that has the highest competition to the lowest competition. So, perfect competition has an extreme level of competition and a perfect competition market structure.

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