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Why Perfect Competition Is not So Perfect

February 1, 2018 in Economics

By Frank Shostak


By: Frank Shostak

According to the popular view, a proper competitive environment must emulate the perfect competition model.

In the world of perfect competition, a market is characterized by the following features:

  • There are many buyers and sellers on the market
  • Homogeneous products are traded
  • Buyers and sellers are perfectly informed
  • There are no obstacles or barriers to enter the market

Moreover, buyers and sellers have no control over the price of the product. They are price takers.

No Room for Entrepreneurs

The assumption of perfect information and perfect certainty implies that there is no room left for entrepreneurial activity. For in the world of certainty there are no risks and therefore no need for entrepreneurs.

However, if this is so, who then introduces new products and how? According to the proponents of the perfect competition model, any real situation in a market that deviates from this model is regarded as sub-optimal to consumers’ well-being.

It is recommended that the government intervene whenever such deviation occurs in order to again impose a competitive model closer to a state of perfect competition.

Also according to the popular view, the government must intervene to prevent the emergence of a situation where a producer dominates or monopolizes a market and sets the price above the truly competitive level. This, it is held undermines consumers’ well-being.

Not Even Potential Monopolists Can Charge Any Price They Want

In real life, though, the ability of a producer to monopolize a market is limited by several factors. 

First, we must note that the goal of the typical business is to make profits. This however, cannot be achieved without offering consumers a suitable price.

It is in the interest of every businessman to secure a price where the quantity that is produced could be sold at a profit. In setting this price the producer entrepreneur will have to consider how much money consumers are likely to spend on the product. He will have to consider the prices of various competitive products. He will also have to consider his production costs.

Any attempt on behalf of the alleged dominant producer to disregard these facts will cause him to suffer losses. Further to this, how can government officials establish whether the price of a product charged by a dominant producer is above the so-called competitive level?

How can they know what the competitive price is supposed to be? According to Murray Rothbard,

There is no way to define “monopoly price” because there is also no way of …read more


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