case study on perfect competition pdf

Academia.edu no longer supports Internet Explorer.

To browse Academia.edu and the wider internet faster and more securely, please take a few seconds to  upgrade your browser .

Enter the email address you signed up with and we'll email you a reset link.

• We're Hiring!
• Help Center

Perfect Competition A Case of Market-Failure

In this paper we research one of the corporate governance mechanisms, i.e, market for goods and services. We focus on perfect competition. We concluded with the explicit argument for letting loose the dogs of the Federal Trade Commission and the Antitrust Division of the Justice Department upon perfect competitors. Our main concern is the failure of mainstream economics to incorporate, properly and completely, the concept of foregone alternatives, into its analysis. The present paper is an attempt to trace out the some of the implications of this critical error for industrial organization.

Related Papers

Journal of Public Economic Theory

David Kelsey , Frank Milne

This paper studies the objective function of the firm in imperfectly competitive industries. If those involved in decisions are also consumers the usual monopoly distortion is reduced. In oligopolistic industries, this may give the firm a strategic advantage and hence, in the right ...

California Law Review

Edward Rock

Angela Wigger

Dr. Ravinder Rena

This paper addresses the concern that monopolies arise naturally out of the free market. An attempt is made to compare and contrast two theories of monopoly economic and political monopoly that this is not true. This paper further demonstrates that the two theories of monopoly have their separate roots in two opposite theories of competition: perfect competition and competition as rivalry. Hence the paper discusses only one of these theories of competition accurately describes the nature of competition in an economy. Besides, the paper also delves the two theories of competition and monopolies are derived from collectivist and individualist political philosophy. It illustrates how perfect competition and economic monopoly have undermined economists' understanding of the actual nature of both competition and monopoly. After investigating these theories, an attempt to made to apply them to show how one can come to very different conclusions about when monopoly power does and does ...

Economists have long extolled the virtues of markets. Unfettered competition protects consumers from the political influence of lobbies, and forces producers to deliver products and services at cost. Alas, competition is rarely perfect, markets fail, and market power—the firms' ability to raise price substantially above cost or to offer low quality 1 —must be kept in check. Industrial organization studies the exercise and control of market power. To this purpose, it builds models that capture the essence of the situation. The predictions of the model can then be tested econometrically and possibly in the lab or the field. In the end, the reasonableness of, and robustness to modeling assumptions and the quality of empirical fit determine how confident economists are in making recommendations to public decision-makers for intervention, and to companies for the design of their business model. Industrial organization has a long tradition: first theoretical, with the work of French " engineer-economists " Antoine Augustin Cournot (1838) and Jules Dupuit (1844); then policy-oriented with the enactment of the Sherman Act (1890) and subsequent legislation; then descriptive with the studies of the Harvard school (" Structure-Conduct-Performance ") comforting and refining the antitrust drive; and finally skeptical with the Chicago school. The Chicago school correctly pointed out the lack of underlying theoretical doctrine and went on to cast doubt on the whole edifice. It however did not develop an alternative antitrust doctrine, perhaps because it was broadly suspicious of regulation. By the late 1970s and early 1980s, the antitrust and regulation doctrine was in shambles and had to be rebuilt. The modern intellectual corpus that then emerged 1 Industrial organization economists have studied a variety of other market failures, involving information problems and a range of externalities (such as environmental damages or banking failures) which arise even in the absence of market power; small banks (such as the Cajas and the Landesbanken recently in Europe) often fail, leaving the slack for the deposit insurance fund/taxpayer to pay, and firms without market power often pollute. This lecture will focus on market power, which limits the diffusion of a product, service, or technology to downstream firms and end-users.). This lecture is dedicated to the memory of Jean-Jacques Laffont. It is of course unlike any lecture I had ever given. It is filled with emotion, intellectual indebtedness, and very fond memories. The lecture is also very unfair to the community of researchers who have developed industrial organization economics in its modern form. The lecture indeed is in no way a survey, even on its very limited subset of topics, and does not attempt to recognize contributions. Its purpose rather is to use examples drawn from my own research to illustrate the approach and use of theoretical industrial organization. This should however not obscure the fact that modern industrial organization is the outcome of a collective undertaking by a (still vibrant) community of talented researchers. † This article is a revised draft of the lecture Jean Tirole delivered in Stockholm, Sweden, on December 8, 2014, when he received the Bank of Sweden Prize in Economic Sciences in memory of Alfred Nobel. This article is copyright © the Nobel Foundation 2014 and is published here with the permission of the Nobel Foundation. Go to http:// dx.doi.org/10.1257/aer.15000024 to visit the article page.

The American Economic Review

Martin Weitzman

While the issues raised by Marius Schwartz and Robert Reynolds are quite different from those raised by Martin Weitzman, they have three significant common elements: an at-tempt to impose a dynamic mechanism upon a static equilibrium analysis, the provision of new and ...

Michigan Law Review

PeteR Hammer

Keith Tribe

This paper, prepared for an EUI workshop on cartels in 1993, outlines the development of the economic analysis of competitive markets and the way in which economists sought to deal with the problem of oligopoly before 1950

Raul V Fabella

Regulation and competition policy are two alternative modalities by which the state intervenes in the market. In order for either to deliver welfare gains, there must first be a pre-existing market failure. We first present different varieties of market failures and identify those for which regulation is best address (cooperation failures such as The Fishing Game and the Public Goods Game, scale economies-based failures such as a Natural Monopoly and Meta-Market Failures) and those where competition policy works better (market power-based failures such as an artificial monopoly or cartel). We also discuss those market failures which cannot be remedied by an imperfect state. We show graphically the welfare outcomes of various industrial organizations (monopoly, duopoly, Walrasian limit) under the symmetric Cournot competition. We also deal with the welfare implications of imperfect substitutability. We then discuss some welfare implications of the Bertrand competition, its effect on innovation and on the formation of ‘trusts’. We present reasons why competition policy is better than regulation in jurisdictions where institutions are weak. The reasons are: information intensity and asymmetry being greater with regulation, the greater ease of capture of the organs of regulation and, finally, the presence of private players who serve as allies of the competition agency and help monitor abuse of market power.

Journal of the History of Economic Thought

Nicola Giocoli

RELATED PAPERS

Annals of Agricultural and Environmental Medicine

Francisco Silveira

JURNAL MINA SAINS

MOHAMAD SAM'UN

Atlas of Genetics and Cytogenetics in Oncology and Haematology

Daniel Sinnett

Sivasamy Soundararajan

Proceedings of the 21st …

22. Nguyễn Lương Lệ Quỳnh

AIAA Guidance, Navigation and Control Conference and Exhibit

Teera Kusolsuk

Frontiers in Plant Science

Sophie TROUVELOT

Journal of Surgical Research

Rebecca Sippel

Nicoletta Riccardi

List Forum für Wirtschafts- und Finanzpolitik

Wiebke Störmann

Asian Journal of Research in Crop Science

Muhammadu Salaudeen

GS Umamaheswara Rao

Journal of the American Chemical Society

Katarina Edwards

Tribology in industry

BOGDAN NEDIC

Alhadi Jahan

IEEE Transactions on Learning Technologies

Sekou L Remy

Iranian Journal of Medical Ethics and History of Medicine

mohammad asadinejad

Journal of Cosmology and Astroparticle Physics

María I. Micheletti

Journal for ImmunoTherapy of Cancer

Fabio Spiga

•   We're Hiring!
•   Help Center
• Find new research papers in:
• Health Sciences
• Earth Sciences
• Cognitive Science
• Mathematics
• Computer Science
• Academia ©2024

Theories of Imperfect Competition

• First Online: 04 September 2022

Cite this chapter

• Cheng-chung Lai 3 &
• Tai-kuang Ho 4  

181 Accesses

Perfect competition is something like “vacuum” in physics. It is a kind of pure state, a benchmark, or a standard reference point to contrast the real environment, with three main features.

The best of all monopoly profits is a quiet life. —Sir John Hicks

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

• Available as EPUB and PDF
• Read on any device
• Instant download
• Own it forever
• Compact, lightweight edition
• Dispatched in 3 to 5 business days
• Free shipping worldwide - see info
• Durable hardcover edition

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

Author information

Authors and affiliations.

Hsinchu, Taiwan

Cheng-chung Lai

Department of Economics, National Taiwan University, Taipei, Taiwan

Tai-kuang Ho

You can also search for this author in PubMed   Google Scholar

Corresponding author

Correspondence to Cheng-chung Lai .

Rights and permissions

Reprints and permissions

Copyright information

© 2022 The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd.

About this chapter

Lai, Cc., Ho, Tk. (2022). Theories of Imperfect Competition. In: History of Economic Ideas in 20 Talks . Springer, Singapore. https://doi.org/10.1007/978-981-19-4506-9_15

Download citation

DOI : https://doi.org/10.1007/978-981-19-4506-9_15

Published : 04 September 2022

Publisher Name : Springer, Singapore

Print ISBN : 978-981-19-4505-2

Online ISBN : 978-981-19-4506-9

eBook Packages : Economics and Finance Economics and Finance (R0)

Share this chapter

Anyone you share the following link with will be able to read this content:

Sorry, a shareable link is not currently available for this article.

Provided by the Springer Nature SharedIt content-sharing initiative

• Publish with us

Policies and ethics

• Find a journal
• Track your research

8.1 Perfect Competition and Why It Matters

Learning objectives.

• Explain the characteristics of a perfectly competitive market
• Discuss how perfectly competitive firms react in the short run and in the long run

Firms are in perfect competition when the following conditions occur: (1) many firms produce identical products; (2) many buyers are available to buy the product, and many sellers are available to sell the product; (3) sellers and buyers have all relevant information to make rational decisions about the product that they are buying and selling; and (4) firms can enter and leave the market without any restrictions—in other words, there is free entry and exit into and out of the market.

A perfectly competitive firm is known as a price taker , because the pressure of competing firms forces it to accept the prevailing equilibrium price in the market. If a firm in a perfectly competitive market raises the price of its product by so much as a penny, it will lose all of its sales to competitors. When a wheat grower, as we discussed in the Bring It Home feature, wants to know the going price of wheat, they have to check on the computer or listen to the radio. Supply and demand in the entire market solely determine the market price, not the individual farmer. A perfectly competitive firm must be a very small player in the overall market, so that it can increase or decrease output without noticeably affecting the overall quantity supplied and price in the market.

A perfectly competitive market is a hypothetical extreme; however, producers in a number of industries do face many competitor firms selling highly similar goods, in which case they must often act as price takers. Economists often use agricultural markets as an example. The same crops that different farmers grow are largely interchangeable. According to the United States Department of Agriculture monthly reports, in December 2021, U.S. corn farmers received an average of $5.47 per bushel. A corn farmer who attempted to sell at $6.00 per bushel would not have found any buyers. A perfectly competitive firm will not sell below the equilibrium price either. Why should they when they can sell all they want at the higher price? Other examples of agricultural markets that operate in close to perfectly competitive markets are small roadside produce markets and small organic farmers.

Visit this website that reveals the current value of various commodities.

This chapter examines how profit-seeking firms decide how much to produce in perfectly competitive markets. Such firms will analyze their costs as we discussed in the chapter on Production, Costs and Industry Structure . In the short run, the perfectly competitive firm will seek the quantity of output where profits are highest or, if profits are not possible, where losses are lowest.

In the long run, positive economic profits will attract competition as other firms enter the market. Economic losses will cause firms to exit the market. Ultimately, perfectly competitive markets will attain long-run equilibrium when no new firms want to enter the market and existing firms do not want to leave the market, as economic profits have been driven down to zero.

As an Amazon Associate we earn from qualifying purchases.

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution License and you must attribute OpenStax.

Access for free at https://openstax.org/books/principles-microeconomics-3e/pages/1-introduction

• Authors: David Shapiro, Daniel MacDonald, Steven A. Greenlaw
• Publisher/website: OpenStax
• Book title: Principles of Microeconomics 3e
• Publication date: Dec 14, 2022
• Location: Houston, Texas
• Book URL: https://openstax.org/books/principles-microeconomics-3e/pages/1-introduction
• Section URL: https://openstax.org/books/principles-microeconomics-3e/pages/8-1-perfect-competition-and-why-it-matters

© Jan 23, 2024 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.

• Search Search Please fill out this field.

What Is Perfect Competition?

• How It Works
• Characteristics
• Theory vs. Reality
• Barriers to Entry
• Advantages and Disadvantages
• Profiting in Perfect Competition

Perfect Competition vs. Monopoly

• Perfect Competition FAQs

The Bottom Line

• Business Essentials

Perfect Competition: Examples and How It Works

Learn all about this theoretical market structure

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

• A Practical Guide to Microeconomics
• Economists' Assumptions in their Economic Models
• 5 Nobel Prize-Winning Economic Theories
• Understanding Positive vs. Normative Economics
• What Factors Influence Competition in Microeconomics?
• How Does Government Policy Impact Microeconomics?
• Understanding Microeconomics vs. Macroeconomics
• Differentiate Between Micro and Macro Economics
• Microeconomics vs. Macroeconomics Investments
• Introduction to Supply and Demand
• Is Demand or Supply More Important to the Economy?
• Law of Demand
• Demand Curve
• Law Of Supply
• Supply Curve
• Price Elasticity of Demand
• Understanding Elasticity vs. Inelasticity of Demand
• Factors Determining the Demand Elasticity of a Good
• What Factors Influence a Change in Demand Elasticity?
• What Is the Concept of Utility in Microeconomics?
• What Is the Utility Function and How Is it Calculated?
• Total Utility
• Marginal Utility
• Law Of Diminishing Marginal
• What Does the Law of Diminishing Marginal Utility Explain?
• Economic Equilibrium
• Income Effect
• Indifference Curve
• Consumer Surplus
• Comparative Advantage
• Economies of Scale
• Perfect Competition CURRENT ARTICLE
• Invisible Hand
• Market Failure

The term perfect competition refers to a theoretical market structure. Although perfect competition rarely occurs in real-world markets, it provides a useful model for explaining how supply and demand affect prices and behavior in a market economy.

Under perfect competition, there are many buyers and sellers, and prices reflect supply and demand . Companies earn just enough profit to stay in business and no more. If they were to earn excess profits, other companies would enter the market and drive profits down.  

Key Takeaways

• Perfect competition is an ideal type of market structure where all producers and consumers have full and symmetric information and no transaction costs.
• There are a large number of producers and consumers competing with one another in this kind of environment.
• Perfect competition is theoretically the opposite of a monopolistic market.
• Since all real markets exist outside of the plane of the perfect competition model, each can be classified as imperfect.
• The opposite of perfect competition is imperfect competition, which exists when a market violates the abstract tenets of neoclassical pure or perfect competition.

Jessica Olah / Investopedia

How Perfect Competition Works

Perfect competition is a benchmark or ideal type to which real-life market structures can be compared. Perfect competition is theoretically the opposite of a monopoly , in which only a single firm supplies a good or service and that firm can charge whatever price it wants since consumers have no alternatives and it is difficult for would-be competitors to enter the marketplace.

In a perfect competition model, there are no monopolies. This kind of structure has a number of key characteristics, including:

• All firms sell an identical product (the product is a commodity or homogeneous).
• All firms are price takers (they cannot influence the market price of their products).
• Market share has no influence on prices.
• Buyers have complete or perfect information (in the past, present, and future) about the product being sold and the prices charged by each firm.
• Capital resources and labor are perfectly mobile.
• Firms can enter or exit the market without cost.

This can be contrasted with the more realistic imperfect competition , which exists whenever a market, hypothetical or real, violates the abstract tenets of neoclassical pure or perfect competition.

Since all real markets exist outside of the plane of the perfect competition model, each can be classified as imperfect . The contemporary theory of imperfect versus perfect competition stems from the Cambridge tradition of post-classical economic thought.

Characteristics of Perfect Competition

A perfectly-competitive market is defined by the following factors:

A Large and Homogeneous Market 

There are a large number of buyers and sellers in a perfectly competitive market. The sellers are small firms, instead of large corporations capable of controlling prices through supply adjustments. They sell products with minimal differences in capabilities, features, and pricing. This ensures that buyers cannot distinguish between products based on physical attributes, such as size or color, or intangible values, such as branding.

A large population of both buyers and sellers ensures that supply and demand remain constant in this market. As such, buyers can easily substitute products made by one firm for another. 

Perfect Information Availability  

Information about an industry's ecosystem and competition constitutes a significant advantage. For example, knowledge about component sourcing and supplier pricing can make or break the market for certain companies.

In certain knowledge and research-intensive industries, such as pharmaceuticals and technology, information about patents and research initiatives at competitors can help companies develop competitive strategies and build a moat around their products.

The availability of free and perfect information in a perfectly competitive market ensures that each firm can produce its goods or services at exactly the same rate and with the same production techniques as another one in the market.

Absence of Controls  

Governments play a vital role in market formation for products by imposing regulations and price controls. They can control the entry and exit of firms into a market by setting up rules to function in the market. For example, the pharmaceutical industry has to contend with a roster of rules pertaining to the development, production, and sale of drugs.

In turn, these rules require big capital investments in the form of employees, such as lawyers and quality assurance personnel, and infrastructure, such as machinery to manufacture medicines. The cumulative costs add up and make it extremely expensive for companies to bring a drug to the market.

In comparison, the technology industry functions with relatively less oversight as compared to its pharma counterpart. Thus, entrepreneurs in this industry can start firms with less to zero capital , making it easy for individuals to start a company in the industry. 

Such controls do not exist in a perfectly competitive market . The entry and exit of firms in such a market are unregulated, and this frees them up to spend on labor and capital assets without restrictions and adjust their output in relation to market demands.

Cheap and Efficient Transportation

Cheap and efficient transportation is another characteristic of perfect competition. In this type of market, companies do not incur significant costs to transport goods. This helps reduce the product’s price and cuts back on delays in transporting goods. 

Theory vs. Reality of Perfect Competition

Real-world competition differs from this ideal primarily because of differentiation in production, marketing, and selling . For example, the owner of a small organic products shop can advertise extensively about the grain fed to the cows that made the manure that fertilized the non-GMO soybeans, thereby setting their product apart from competitors. This is what's called differentiation.

The first two criteria (homogeneous products and price takers) are far from realistic. Yet, for the second two criteria (information and mobility) the global tech and trade transformation is improving information and resource flexibility. While the reality is far from this theoretical model, the model is still helpful because of its ability to explain many real-life behaviors.

Companies seek to establish brand value through marketing around their differentiation. As such, they advertise to gain pricing power and market share.

Barriers to Entry Prohibit Perfect Competition

Many industries also have significant  barriers to entry , such as high  startup costs (as seen in the auto manufacturing industry) or strict government regulations (as seen in the utility industry), which limit the ability of firms to enter and exit such industries. And although consumer awareness has increased with the information age, there are still few industries where the buyer remains aware of all available products and prices.

Significant obstacles exist that prevent perfect competition from developing in the economy . The agricultural industry probably comes closest to exhibiting perfect competition because it is characterized by many small producers with virtually no ability to alter the selling price of their products.

The commercial buyers of agricultural commodities are generally very well-informed and, although agricultural production involves some barriers to entry, it is not particularly difficult to enter the marketplace as a producer.

Advantages and Disadvantages of Perfect Competition

Perfect competition is an idealized framework for a market economy. While it provides a convenient model for how an economy works, it is not always accurate and has significant departures from the real-world economy. Like with other models, the value of a perfect competition framework is only accurate to the extent that it reflects actual conditions.

One notable feature of perfect competition is low profit margins. Since all consumers have access to the same products, they naturally gravitate towards the lowest prices. Firms cannot set themselves apart by charging a premium for higher-quality products and services. For instance, it would be impossible for a company like Apple ( AAPL ) to exist in a perfectly competitive market because its phones are more expensive than those of its competitors.

Another is the absence of innovation. The prospect of greater market share and setting themselves apart from the competition is an incentive for firms to innovate and make better products. But no firm possesses a dominant market share in perfect competition, meaning that the long-term profitability of their operations is zero.

Another disadvantage is the absence of economies of scale . Limited to zero profit margins means that companies will have less cash to invest in expanding their production capabilities. An expansion of production capabilities could potentially bring down costs for consumers and increase business profit margins. But the presence of several small firms cannibalizing the market for the same product prevents this and ensures that the average firm size remains small.

Pros and Cons of Perfect Competition

Provides a convenient framework for modeling market activity.

Demonstrates how producers are incentivized to provide lower prices.

The perfect competition model does not always reflect real-world market conditions.

The model does not account for geographical differences or variations between products.

The model does not account for how producers benefit from economies of scale.

Do Firms Profit in Perfect Competition?

Profits may be possible for brief periods in perfectly competitive markets. But the market’s dynamics cancel out the effects of positive or negative profits and bring them toward an equilibrium. Because there is no information asymmetry in the market, other firms will quickly ramp up their production or reduce their manufacturing costs to achieve parity with the firm which made profits.

The average revenue and marginal revenue for firms in a perfectly competitive market are equal to the product’s price to the buyer. As a result, the perfectly competitive market’s equilibrium, which had been disrupted earlier, will be restored. In the long run, an adjustment of supply and demand ensures all profits or losses in such markets tend toward zero.

The opposite of perfect competition is a monopoly, where a single company controls the supply of a certain product. In monopoly conditions, consumers cannot go elsewhere if the price is too high; they can only decide not to buy the product.

This means that rather than setting prices by supply and demand, the monopolistic firm can simply set a price point that maximizes its profits. Some types of firms are considered natural monopolies because there is a significant first-mover advantage that discourages competitors from entering the market. Other monopolies may be established through government actions, or by cartels , such as OPEC .

Examples of Perfect Competition 

As mentioned earlier, perfect competition is a theoretical construct and doesn't actually exist. As such, it is difficult to find real-life examples of perfect competition but there are variants present in everyday society.

Consider the situation at a farmer’s market, a place characterized by a large number of small sellers and buyers. There is typically little differentiation between products and their prices from one farmer’s market to another. How the produce is grown does not matter (unless they are classified as organic) and there is very little difference in how they're packaged or branded. Thus, even if one of the farms producing goods for the market goes out of business, it will not make a difference to average prices.

Supermarkets

The situation may also be relatively similar in the case of two competing supermarkets, which stock their aisles from the same set of companies. Again, there is little to distinguish products from one another between both supermarkets and their pricing remains almost the same. Another example of perfect competition is the market for unbranded products, which features cheaper versions of well-known products.

Product knockoffs are generally priced similarly and there is little to differentiate them from one another. If one of the firms manufacturing such a product goes out of business, it is replaced by another one.

The development of new markets in the technology industry also resembles perfect competition to a certain degree. For example, there was a proliferation of sites offering similar services during the early days of social media networks. Some examples of such sites are Sixdegrees.com, Blackplanet.com, and Asianave.com. None of them had a dominant market share and the sites were mostly free. They constituted sellers in the market while consumers of such sites, who were mainly young people, were the buyers.

The startup costs for companies in this space were minimal, meaning that startups and companies can freely enter and exit these markets. Technologies, such as PHP and Java, were largely open-source and available to anyone. Capital costs, in the form of real estate and infrastructure , were not necessary. Remember that Mark Zuckerberg effectively founded Facebook from his college dorm.

In economic theory, perfect competition occurs when all companies sell identical products, market share does not influence price, companies are able to enter or exit without barriers, buyers have perfect or full information, and companies cannot determine prices. In other words, it is a market that is entirely influenced by market forces. It is the opposite of imperfect competition, which is a more accurate reflection of a current market structure.

What Is an Example of Perfect Competition?

Consider a farmers market where each vendor sells the same type of jam. There is little differentiation between each of their products, as they use the same recipe, and they each sell them at an equal price. At the same time, sellers are few and free to participate in the market without any barrier. Buyers, in this case, would be fully knowledgeable of the product’s recipe, and any other information relevant to the good.

What Is the Difference Between Perfect Competition and Imperfect Competition?

While perfect competition is an idealized market structure in which equal and identical products are sold, imperfect competition can be found in monopolies and real-life examples. For instance, imperfect competition involves companies competing for market share, high barriers to entry, and buyers lacking complete information on a product or service. Unlike perfect competition, however, this creates the incentive to innovate and produce better products, in addition to increased profit margins due to the influence of supply and demand.

Perfect competition describes an imaginary market condition where all consumers have access to the same products and information. In this type of economy, all firms must offer the lowest price possible or risk being undercut by their competitors. Although this is only a theoretical model, perfect competition is useful for demonstrating how economic actors behave in a free market.

U.S. Food & Drug Administration. " Facts About the Current Good Manufacturing Practices (CGMPs) ."

• Terms of Service
• Editorial Policy
• Privacy Policy
• Your Privacy Choices