Perfect competition. The conditions for perfect competition. Perfect Competition Market

The concept of "competition" appeared in the vocabulary of economists from ordinary speech. At first, the word was used quite freely, had no well-established clear meaning. Over time, the definition was refined more and more and eventually entered the category of basic economic concepts.

Theoretical basis

For quite a long time, the concept of competition was interpreted loosely, and until the 70s. There was no systematic and deep understanding of it in the 19th century. Only in the following decades did a theoretical model of competition form. By the 20s of the 20th century, it had developed completely and took its place in science. A. Smith was one of the first to identify the features of perfect competition. His conclusions, which were present in the work of Wealth of Nations, show a complex of factors that are necessary for its establishment. But to see them clearly is very problematic, since for the most part they are only implied.

Structuring Definition

J. Stigler systematized Smith's guesses and singled out the following conditions for perfect competition:

1. Opponents must act not in collusion, but independently.
2. The number of existing or potential competitors should be such as to prevent extraordinary moves.
3. Economic entities should have an acceptable knowledge of the possibilities of trading floors.
4. Freedom from social restrictions is necessary to carry out activities on the basis of available information.
5. There should be enough time for the volume and direction of the flow of resources to begin to meet the interests of their owners.

Concept development

The above model was neither challenged nor supplemented by any economist for an extended period. The concept was developed in the framework of the neoclassical trend. This was due to a change in the very approach to the subject in question. In Smith, the market for perfect competition was presented as a perceived reality. The neoclassicists regarded it as an imaginary, mentally imagined reality. Simply put, competition was presented as something perfect, ideal, existing in the thoughts of the researcher.

Edgeworth Definition

This researcher was the first to introduce the internal organization of competition. His analysis left a bright mark in the development of theoretical foundations. Edgeworth argued that the conditions for perfect competition would exist in the presence of 4 factors:

1. An individual entity may revise a price agreement with any person of an undetermined amount.
2. A person is free to enter into a contract with an undetermined number of counterparties at the same time. This condition, in combination with the previous one, introduces the so-called indefinite divisibility of the subject of each contract. So, if X interacts with an undetermined number Y, then each last one will receive an unknown small fraction from the first.
3. Any person may revise a contract with another regardless of a third party.
4. The subject has the right to freely enter into an agreement with others, regardless of third-party participants.

New systematization of the concept

Given Edgeworth’s definition, market conditions for perfect competition can be established. Such a model requires that:

1. There were an undetermined number of participants on both sides of the trade.
2. There were no restrictions that prevented individual behavior for profit.
3. There was a complete divisibility of the products sold.

However, these factors are not enough for a complete transition to a modern concept. In this scheme, 2 more elements are missing: a static model of the economy and resource mobility. This problem was solved by Clark. The central concept of his work was the static state of the economy. Clark presents this state in the form of a perfect distribution of social elements with which society itself would coincide under the influence of competition on individuals. She, in turn, must act "ideally." This implies the absolute mobility of capital and labor. This condition was added to the general concept of competition by Clark.

Modern interpretation of the concept

The final word in the development of the concept belonged to Knight. In his work on risk, uncertainty and income, which came out in 1921, he formulated the main factors on the basis of which the market of perfect competition is established. They look like this:

1. It is assumed that members of society behave quite "rationally." In this case, we mean ordinary human motivation. It is assumed that individuals are aware of their desires and strive to satisfy their needs in reasonable ways. They are aware of the results of their activities at the time of the commission of behavioral acts. Moreover, in the process, individuals also understand the likely consequences.
2. It is assumed that there are no material obstacles to the formation, execution and change of plans at personal discretion. In other words, “perfect mobility” is necessary in the implementation of any economic adjustments, and there should be no expenses related to changes or movements. For a clearer understanding of this ideal, it should be imagined that all the components that are used in the calculations (goods, scope of work, and so on) should be distinguished by constant variability and unlimited divisibility. At its core, the exchange of products (ideally) is cost-free and instant.
3. From the second paragraph it follows that there is perfect competition. Within its framework, a cost-free, continuous, ideal relationship is established between the current members of society. Each potential consumer has good constant knowledge and freedom of choice among existing offers from potential sellers and vice versa. Each product is divisible by a specific number of units. Their possession is carried out separately. These units will compete with each other.
4. Each individual must carry out his actions separately, absolutely independently of the rest. This, in turn, excludes any form of secret conspiracy, monopoly and tendency to it.
5. The established factors should be kept unchanged. In a static model, each individual will soon find out, if he is still not aware, all about his status and the environment that affects his behavior.

These provisions are considered a “purification”, or idealization of trends that, to one degree or another, correspond to the real situation. They act as fundamental factors on which a perfect market and perfect competition are based.

Negative assessment of Knight's concept

The factors on which a perfect market and perfect competition are based attract with its accessibility and simplicity, transparency and sophistication. In this regard, at the time, this model was immediately adopted in the scientific community. However, there was a rather harsh criticism of these provisions. Knight, in particular, was reproached for the unrealistic concept. A negative assessment peaked by the 30s. At this time, conflicting theories appeared, in which perfect and imperfect competition was opposed. Immediately formed another concept.Many considered it very promising. In economic circles, the perfect and monopolistic competition. Some researchers even talked about the tyranny of Knight's concept. The reproach of unrealism is very serious. However, can it be considered reasonable in this case? It should be noted that any theory that claims to have a high level of generalization and accuracy should be represented in the form of abstraction. This is exactly what the complex of factors looks like on which perfect competition is based.

Model specifics

Perfect competition - a rivalry between sellers, manufacturers of products that exist on the "ideal trading platform." It presents an unlimited number of suppliers and consumers of similar, homogeneous and interchangeable goods interacting with each other in a free way. Perfect market competition will exist only when certain requirements and principles underlying it are met.

Number of companies and their impact

One of the most important conditions for the operation of the model is a large number of enterprises that produce homogeneous goods. Along with this, the "smallness" of the subjects should also take place. The latter concept means that the supply / demand of perfect competition is represented in such small volumes in comparison with the total sales turnover that these participants cannot influence prices. Theoretically, such a situation is impossible. Shift supply curve from any manufacturer will inevitably cause changes in the total volume. This in turn will affect equilibrium price. In fact, a small firm in the perfect competition market will not affect the selling price. To eliminate the contradictions, the “smallness” of the entities is treated as a situation in which the share of each enterprise in the total sales volume is insignificant, and the number of companies in the industry is huge. An example is the stock exchange, the market for agricultural products or foreign exchange.

Product uniformity

When this condition is fulfilled, it is unlikely that consumers will prefer the products of one enterprise because of its significant superiority in quality or properties relative to products of another company. For example, many farmers sell potatoes daily. This market can be considered very competitive. In this case, no farmer receives more than 1% of sales per day. And if the share of each seller grows to 2%, it is unlikely that this will somehow affect the cost of production.

In terms of utility theory, product homogeneity means that products from different manufacturers are interchangeable for each customer. Moreover, the marginal rate for substitution is 1. For example, when replacing an apple from one producer with an apple from another, the utility of the kit will not change. In this case, consumer indifference curves will be presented in the form of segments inclined to the axes at 45 degrees. In life, completely homogeneous products are extremely rare. Sugar, oil, etc. have a high degree of similarity. Goods such as toys, books, and so on cannot be considered homogeneous.

Lack of barriers

For a new manufacturer, when entering the industry, no obstacles should be created. In addition, each company in perfect competition should be able to freely leave the sector. Entrance barriers may include:

1. The presence of licenses and patents, through which the pre-emptive rights to release a certain product are ensured (production of alcoholic products, for example).
2. The relatively high costs required to form production in the industry (for example, heavy industry).
3. Significant return on production scale, providing an advantage to large companies that benefit from the expansion (natural monopolies).
4. Restriction of mobility of resources (the rules by which citizens are registered often interferes with the free movement of labor reserves between territorial labor markets).
5. Attaching consumers to sellers / manufacturers (for example, servicing a residential building with a specific communal service).

Free exit from the industry and entry into it guarantee the absence of an agreement between suppliers on increasing prices by reducing output. Any increase in value can attract new companies that can increase the supply.

Information transparency

Each company in perfect competition should have access to any kind of information relating directly to production technologies, factor prices. Along with this, buyers should be able to receive all information about the characteristics of the product and its value. In the case when sellers have a large amount of data on the consumer characteristics of the product, then there is an asymmetry. For example, the market for medical services. In it, patients (buyers) are not able to adequately assess the compliance of the quality of work with its cost.

Mobility

Perfect competition implies that the seller / consumer can instantly make a transaction with another participant without additional investments. Today, the mobility of subjects is achieved through computer technology. In other cases, the process of “switching” one consumer from a particular seller to another usually requires time, and in some situations transport costs. In the presence of perfect mobility and information transparency, the sale of homogeneous products is carried out at a single cost. Moreover, there is a rational behavior of all subjects. That is, any form of collusion is excluded. Profit in perfect competition, therefore, for each individual entrepreneur will depend on his behavior.

Expenses

Costs of companies for the production of homogeneous products have insignificant differences. This is due to the similarity of the cost of resources and the similarity of technology. If these conditions are not met, and one of the companies has lower production costs than others, then it may well upset the balance. This is achieved by supplying goods at a lower cost, inaccessible to other enterprises. As a result, the company will be able to capture more of the industry than its rivals. Thus, perfect and imperfect competition is formed depending on a number of factors, among which production costs occupy a special place. At the same time, transportation costs will not have a significant impact on the formation of proposals. This means that there is no danger of non-competitiveness of many manufacturers due to high transportation costs.

Conclusion

In practice, perfect competition is quite rare. However, this fact does not mean that the analysis of such a model is impractical. There are a number of industries that are closest to perfect competition. For example, many of the features of America’s agriculture are easier to understand if you have knowledge of how this market model works. Pure rivalry is presented as the simplest situation, to which categories such as "costs" and "income" apply. Perfect competition acts as a multi-valued starting point for discussing any issues related to determining production volume and pricing. The functioning of this model allows you to have a sample, a standard with which you can compare and evaluate the effectiveness of the real economic situation.