Money and Markets: Perfect Competition

Perfect competition sounds great, like a fun video game or challenge between friends! But in perfectly competitive markets, none of the “players” really win.

There’s a lot of econ stuff going on here - the main takeaway here is that firms have to take the price (P) established in the industry!

We’ve already tackled monopolies in a previous article. Monopolies are caused when there are insurmountable barriers to entry, meaning that it is impossible to enter into the market so there is only one. As new firms are not able to enter the market, monopolies can earn a profit in the long run as they are not competing for any prices. Essentially, a monopoly is the whole market for the product it sells. 

On the other end of the spectrum is perfect competition. Unlike monopolies, a perfectly competitive market has thousands to millions of firms producing and there are no barriers to entry. This means that it is very easy for a firm to enter this market. A perfectly competitive market also has the characteristic that one firm has the power to influence the market price and quantity supplied. This makes it so that the price and quantity supplied is set by market forces rather than individual firms, and the market is perfectly efficient as it is meeting all of society’s needs. Monopolies on the other hand are inefficient as they provide too few goods at too high prices. Since they face little competition, they are also less likely to innovate and choose the lowest-cost methods of production. In a perfectly competitive market, firms also do not earn any profit in the long run. This is why none of the competitors “win”! If there was economic profit being made, it would cause more firms to enter the market, which would lead to 0 economic profit in the long run. One similarity between Monopolies and perfect competition is that they both have no brand differentiation (meaning that different firms do not have anything unique to offer when producing their product). Due to this, it is impossible to raise prices over the market price within perfectly competitive markets. 

Both monopolies and perfect competition do not really exist in the real world and are mainly theoretical models that economists use. However, there are markets that get close. One market that resembles perfect competition is the market for grain and most agricultural markets. As there is no real way to differentiate between products, there are lots of firms in the market, and since changing from one crop to the other is relatively easy for farmers, the grain market is considered to be perfectly competitive. 

We hope this helps, and drop any questions under the comments!