What is a competitive market?

What is a competitive market?

March 12, 2019 admin 0Comment

When we talk about a competitive market, we are talking about a market where numerous producers compete to satisfy the needs and wants of the consumer. So, a single producer or a single consumer cannot dictate on how the market operates. They cannot determine the price or the quantity of the goods that will be produced alone.

The Three Basic Market structures in a competitive environment

Perfect Competition

As its name suggests, a perfect competition market structure is one in which many companies compete with one other for business. Also known as pure competition, in this structure, no single business has any competitive advantage over the other…

In a competitive market of this type:

  • The companies aim is to maximize profits.
  • The companies sell identical products and customers demonstrate no preferences for products. Supply and demand dictate how many goods and services are produced.
  • The are no limitations on entering or exiting the market.

The stock and agricultural markets represent the best examples of perfect competition market structures. For instance, There are thousands of farmers and none of them can influence the market or the price of the crops, based on how much they grow. All the farmer can do is grow the crop and accept whatever the current price is for it. They do not get to decide the price they want to sell the crop for.

Monopolistic Competition

In a monopolistic competition market structure many companies compete against one another, but unlike the perfect competition model, the companies sell similar and not identical products. The differences among these products give the companies the influence to charge higher for the products they are offering.

In a competitive market of this type:

  • The businesses aim to maximize their profits. The companies sell similar products but are differentiated based on brand, style, image, price and packaging. Consumers usually have a preference for certain products. There are no restrictions on entering and leaving the market.

Businesses that operate based on this competitive market structure include clothing stores, department stores, fast food restaurants and beauty salons and spas.

Oligopoly Market

In this market structure a few companies that influence the market. In this market, there are a few firms which sell homogeneous products. Also, as there are few sellers in the market, every seller influences the behaviour of the other firm. For instance, if Pepsi increases or decreases the price then Coca Cola is likely to do that too

In a competitive market of this type:

  • The companies set prices to maximize their profits in accordance with one another.
  • The companies may sell products that are the same or different.
  • It is difficult to enter and leave such a market since the companies enjoy control over such things as patents, raw materials and other physical resources.

Characteristics of a Perfect Competitive Market

(1)Innumerable Buyers and Sellers

The buyers and sellers in a perfect market cannot be counted. Due to the presence of a large number of buyers and sellers, no single buyer/seller can influence the price of the commodity or the supply chain of the market. It is the combined actions of all the buyers and sellers in the market that determines the price of the commodity. Once the price is determined by the market, every seller and each buyer has to abide by it.

(2) Homogeneous Product:

The product sold by all the seller is identical in all the aspects be it quality, design, packing etc. The buyers, therefore, do not prefer the product of one seller to that of another.

As a result, each seller has to sell their product at the same price. If any seller tries to sell his product at a different price, his product will be out of the market.

(3) Perfect Knowledge of the Market:

Buyers and sellers are perfectly acquainted with the market conditions. They are in very close with the entire market and whenever there is any change in the market, it is immediately made known to all the buyers and sellers.

(4) Freedom of Entry and Exit:

There is no constraint on entering or exiting of a new or existing firm respectively. Due to these characteristics, all firms can make only normal profit in the long run. In the short-run, the number of sellers in the market is fixed.

(5) Uniform Price:

The price of the commodity is determined by the market. An individual seller takes the price as given. He cannot influence the price. His contribution to the total supply of product is negligible. He can sell at the given price only.

(6) Perfect Mobility of Factors:

Factors of production are perfectly mobile under the perfect competition. In other words, factors of production can freely move from one industry to another.

Examples of perfect competition or Perfectly competitive market

In reality, it is hard to find examples of industries that can be called as perfectly competitive market. However, some industries are close.

  1. Foreign exchange markets. Here currency is all homogeneous. Also, traders will have access to many different buyers and sellers. There will be good information about relative prices. When buying currency it is easy to compare prices
  2. Agricultural markets. These are the closest representation of perfectly competitive markets. These are marketplaces which have a large number of vendors selling identical products like fruit, vegetables, and poultry. The prices of goods are competitive, and no single seller can have influence over the prices of these commodities. Consumers are also free to pick any seller to buy the products, depending upon their choice.
  3. Internet-related industries. The internet has made many markets closer to perfect competition because the internet has made it very simple and efficient to compare prices, quickly. Also, the internet has made barriers to enter the market lower down. For example, selling a popular good on the internet through a service like eCommerce websites is close to perfect competition. It is easy to compare the prices of commodities like books and buy from the cheapest option available. Thus, the internet has enabled the price of many books to fall in price so that firms selling books on the internet are only making normal profits. Such is the case with any other commodity.

That’s all folks! Hope you would find this article beneficial. Let us know with comments section below.