What Makes Up a Competitive Market?
According to an economic way of thinking, what makes up a competitive market?
Neoclassical theories of microeconomics are based on the study and explaining of consumer and organizational behaviour in the context of a market. Each of these entities makes decisions and takes actions based on their own end goals and the influence of limitations that arise from quantity and quality of products and services on offer, technology as well as market structure. Market structures are themselves categorized based on buyers and sellers and they interactions between the two. However, a majority of economic documents categorize markets from a seller perspective.
The level of competition between sellers is defined based on a blend of influencers such as the number of sellers present in a market, the differentiation of products and services being offered, as well as the number of buyers within the market. There are four main classifications of competitive markets, namely: a) perfect or pure competition, b) imperfect or monopolistic competition, c) Oligopoly, and d) monopoly. Perfect competition and monopoly can be said to form the extreme ends of possible market structures.
The key characteristics of perfect or pure competition are: a) a great number of buyers and sellers, none of whom can exercise any power over the market, b) no product differentiation whereby buyers have the option to choose between homogenous products and perfect substitutes, and c) minimal or no entry barriers for sellers to enter or exit the market . Perfect competition has the ideal characteristics that ensure that the ability or power to set market prices does not rest with any seller or buyer.
In such a market, sellers become price takers, wherein the price of the product is dictated by the laws of demand and supply alone . Once the market price is set, sellers respond by adapting their variable inputs and outputs for short term operations. For long term operations, sellers may change the scale of plant . As all the products being offered are the same or perfect substitutes, sellers cannot afford to raise prices above the market prices as consumers would simply make purchases from rivals selling the same product at lower prices.
In addition to the above mentioned characteristics, a perfect competition market also has perfect transparency and absolute information visibility. This implies that every seller and buyer is aware of the market conditions and technological developments, giving every seller an equal opportunity to adapt their operations in order to make the most of market opportunities. Further, every seller has equal access to resources such as labour, raw material and infrastructure, which are easy to access and have high mobility .
While perfect competition ensures that the market conditions are fair for all stakeholders, sellers do not have the opportunity to capitalize profits. This lack of flexibility and influence reflects poorly on their ability to drive greater profits and, as such, make a bare minimum earning. In cases where market conditions that influence price contradict each other, there is a great chance that sellers may, in fact, have to bear a loss. For example, companies dealing in gasoline or petrol may be forced to import products at international trading prices, but could be forced by government regulations and price caps to sell the same to end users at prices that are not profitable.
Bibliography
Makowski, L., & Ostroy, J. (2001). Perfect Competition and the Creativity of the Market. Juornal of Economic Literature , XXXIX, 479-535.
MHHE. (2013). Chapter 11: Managerial deisions in competitive markets. Retrieved March 13, 2013, from McGraw-Hill: http://highered.mcgraw-hill.com/sites/dl/free/0073375918/786817/10e_11_Chap_Student_Workbook.pdf
NDSU. (2012, August 20). Characteristics of Competition. Retrieved March 13, 2013, from North Dakota State University: http://www.ag.ndsu.edu/aglawandmanagement/agmgmt/coursematerials/competition
Reynolds, L. R. (2005). Basic Microeconomics: An outline - Part II: Chapter 12. Retrieved March 13, 2013, from Boise State University: http://web1.boisestate.edu/econ/lreynol/web/PDF/short_12_pure_comp.pdf
