Perfect competition - what is it?

Perfect competition is a theoretical model in economics that assumes that nothing constrains price competition between producers. In simple terms, it says that there is a potentially unlimited number of firms, customers and products. Of course, in practice, no company operates in a situation of perfect competition because there are always some limiting factors. There are, however, some industries that come very close to this model. This includes, in some respects, e-commerce.

Features of a perfect competition market

The model of perfect competition does not, as a rule, fully accurately describe any market situation. It can be said to be a certain simplification, intended to allow economists to predict and describe particular market trends. As such, it is subject to a number of more or less realistic assumptions, such as:

• An unlimited number of competitors selling the same or very similar goods. This does not mean that there are an infinite number of players in the market, but that their number is very large and the market is open. Traditionally, agricultural production has been considered as an example of a perfect competition market, which is largely true for family farms.
• No major difficulties in entering the market. It does not require significant investment and, above all, access to resources or technology that are not readily available. For example, to produce strawberries you need land, people and widely available knowledge of horticulture, and to set up an e-shop in a dropshipping model you need a computer with internet and good intentions.
• Customers do not suggest the brand name when choosing products - sometimes they are not even aware of which manufacturer the product comes from. This is because the articles in the perfect competition model are essentially identical. The aforementioned strawberries, cereals or milk from different farmers are normally indistinguishable. In e-commerce, often many shops sell exactly the same product.
• In perfect competition, promotions, discounts and special rebates do not count. On the contrary, these are treatments that retailers use to get out of the system. However, this is not easy, as can be seen in e-commerce: online shops have loyalty programmes, but the customer will still go first where he or she can buy the item cheaper.
• The number of buyers is not limited. Again, it is not that there are an infinite number of potential buyers, but that there are enough of them for the manufacturer to sell all the goods it pays to produce. In the case of e-commerce, this has a more realistic dimension - in theory, the number of potential customers is almost unlimited, as the reach of an online shop can be global.
• Prices are not regulated by external factors such as state intervention, guild organisations, price collusion, etc.
• A company can go out of business at any time when it is making losses.
• Excellent competition is distinguished by very good market information. The idea is that the customer understands that the products are the same and knows enough about the manufacturers/vendors to always find the cheapest offer.
• Consumers do not pay additional costs to conclude transactions. In the case of e-commerce, this is not true, as customers pay for the shipping of goods.

Excellent competition - prices

A trader in a perfect competition situation cannot independently and freely set prices. That is, he can set them at any level he wishes because, as already mentioned, nothing dictates them in advance. In practice, however, there is only one price at which a company will remain in the market.

It is set at the level where supply equals demand, i.e. at the market equilibrium point. This price is not determined by specific actors, but by the market.

In the perfect competition model, the cost of marketing a product is fixed. If a producer raises the price of a product too high, customers will buy it from a competitor. In turn, if demand exceeds supply, there is nothing stopping new entrants from entering the market with the same offer or existing firms from increasing their production.

Thus, the price of a commodity is always marginally higher than the cost of production. Companies cannot, of course, go below this value because production will cease to be profitable for them. Nor do they have any way to raise it, because then competition will drive them out of the market.

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Perfect competition - examples

As already mentioned, no company really operates in a situation of perfect competition. There are, however, industries that come close to this model. The example of agriculture is traditionally cited here. Every onion or potato is basically the same, every farmer has similar costs and there are too many family farms for any of them to have an impact on the market.

Agriculture escapes from this into consolidation or, conversely, into organic production and regional products. It can also count on state aid (intervention purchases, subsidies) because it is (counterintuitively) a strategic industry.

Today, perhaps the closest to this model is e-commerce, at least in some of its aspects. Entering the e-commerce market on a small scale is very easy, thanks to solutions such as dropshipping. At the same time, some shops sell exactly the same products and price comparison sites provide customers with very good market information.

Any marketing effort can only give a shop an advantage if prices are kept to a minimum. For example, the prices of larger electronics, even in large chain stores with stationary showrooms, are kept by the market at 'online' prices. This is how perfect competition works. However, let us emphasise that this only applies to a certain e-commerce sector.

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