One way to succeed in business is to know the type of market or industry you are exposed to. Because each type of market has its own characteristics. and as a businessman You should take advantage of these characteristics to develop an appropriate operational strategy.
Broadly speaking, markets are divided into two types: perfect competition markets (perfect match) and imperfectly competitive markets (flawless competition). In this article, the author will discuss only the first type. While market competition is imperfect, such as monopolies and oligopoly Mentioned in previous articles:
The definition of a perfect competitive market
A perfect competitive market is a type of market where the number of buyers and sellers transacting in the market is equal and the goods sold are homogeneous. As a result, the prices of goods in this market are influenced solely by supply and demand. And neither the seller nor the buyer has the power to influence the price.
This type of market is quite rare in the real world. And it is just a theoretical benchmark that is a perfect example of how transactions for buying and selling products should take place. However, the theory is still taught to make you understand how imperfect markets occur.
Figure 1 illustrates how this type of market is represented graphically. In the picture it is clear that many buyers will keep the demand for the goods sold the same (not fluctuating). Also, because the number of sellers is equal and the product is homogenous. The seller has no control over the market price (P), so the market price (P) is equal to average revenue (AR) and incremental revenue (MR).
Features of a Perfect Competitive Market
Here are some specifics of this type of market you need to know:
1. Products sold are homogeneous.
In this type of market, the products sold are homogeneous. although not homogeneous But the product is produced similarly. This makes it difficult for shoppers to differentiate between one product and another.
In addition, the number of companies operating in this market is large and full of small companies, so no company can manipulate the market by playing with the number of products on offer.
Due to the large number of sellers and the same type of product Buyers can easily switch from one seller to another. And if a new company comes in, the price may drop.
2. Perfectly distributed information
The definition of completely sparse data (perfect information) is that all buyers know all the information that belongs to the seller and vice versa. Sellers are also aware of the information held by other sellers, so there is no change in prices or offers in this market.
It is undeniable that information is one of the factors that make the company superior to other companies. insiderYou can buy stocks first before profiting after the price rises (insider trading).
3. Lack of government control
A fully competitive market (perfect match) is one of the most classical economic theories. in this economic theory Government involvement in industry is seen as a bad thing and should be minimized.
The reason is that government participation can benefit one party and not benefit the other. Therefore, market performance does not move due to supply and demand Just. For example, the government imposes a higher UMR and burdens the entrepreneur. because of this participation It is possible for employers to stop recruiting new employees. Although theoretically Employers will need new employees.
4. Shipping costs are not expensive.
The amount of transportation costs can cause a difference in the price of goods from one place to another. on the contrary in this type of market High and low prices are influenced only by supply and demand. and no other factors
5. Sellers enter and exit conveniently
There is no government control and the product is homogeneous. This makes entering this type of market quite easy. As a result, new companies can easily enter and exit this type of market.
Perfect Competitive Market Example
It is said that a perfect match rarely or even never happens in the real world. due to unrealistic characteristics Goods in a market or industry are generally non-homogeneous and can be distinguished due to materials, uses, production methods, etc.
For example, shampoo A and shampoo B, although they are both shampoos and hair washes, shampoo A is different from shampoo B because the first product is aimed at dandruff, while the second is made to reduce hair loss.
as well as the perfect data hypothesis (perfect information). The Buyer is unaware of all the information owned by the Seller and the Seller is unaware of the information owned by other sellers.
even in the stock market The price is actually created by supply and demand. And every buyer and seller knows about the price action in the market. Buyers may also not be aware of the information the seller holds. For example, the seller manages financial records. Buyers without an accounting or finance background will certainly not know about this arrangement.
Advantages and Disadvantages of a Perfectly Competitive Market
Jun Surjani in his book Economic Theory (Micro Approach) (2018) mentions the advantages of this type of market as follows:
- Price is really caused by the mechanism of supply and demand.. with assumptions perfect informationBuyers can easily estimate the price of the desired product.
- Producer prices are based on the average minimum cost. Therefore, in the long term, it will be beneficial to consumers.On the other hand, consumers can easily switch from one seller to another. If that seller sells their products at a higher price
- Sellers do not pay for advertising.. With a large number of buyers So the seller doesn’t have to spend money on advertising. Because the purpose of advertising is primarily to reach buyers.
- Fixed Income Homogeneous Types of Goods And the assumption of perfect information will make sellers reluctant to innovate and innovate..
- Lack of product options that consumers can choose from. Because the goods sold are homogeneous
- The absence of government intervention can lead to practices that violate norms and morals.. For example, to keep costs as low as possible. Workers’ wages have been suspended. While their productivity has increased dramatically.
- A perfect competitive market is just a theory that must be understood in order to understand an imperfect market theory..