Pure competition is a market structure that involves different manufacturers providing customers with similar products. A large number of homogenous goods, many sellers that can easily enter the market, and customers who have full information about the companies and their products create a perfect environment for this market model.
Why is pure competition considered an unsustainable system?
There are four different market structures. First of all, let’s review pure competition and the reasons why it’s considered an unsustainable system:
- the difference in price is often too minimal to have an influence;
- it’s easy to enter and leave the market, hence the market is crowded with manufacturers;
- it’s difficult for customers to distinguish goods of one manufacturer from another;
- sellers can’t gain profit due to the low prices they offer.
Now that you know some basics, let’s proceed to pure competition’s five distinctive features.
Characteristics of Pure Competition
- Many competing companies
- The same products are offered
- Same market share for all businesses
- Buyers have full information
- Companies can easily enter and leave the market
To fully understand this concept, let’s consider the following characteristics.
- Many competing companies. A market with pure competition has many companies that compete with each other. A large number of competitors that sell the same products prevent price rising among businesses. So, producers offer their products at an average price to stay on the market. This process has a positive effect on customers as they don’t have to spend a lot if they decide to change the seller.
- The same products are offered. One of the main characteristics of pure competition is that firms sell similar goods. As a result, it’s difficult for customers to distinguish between different brands. That’s why they can easily change the brand of the product they need without overpaying.
- Same market share for all businesses. Since companies can’t compete on the market due to similar prices, they all have an equal market share. Thus, if one company decides to lower its prices, it will suffer losses. On the other hand, if a firm decides to increase prices, it will lose customers as there are a large number of other companies offering the same product at a lower price.
- Buyers have full information. A consumer knows that one of the companies can sell the product for a lower price. Thus, businesses are not willing to raise prices ahead of their competitors. To gain more profit, some firms decide to produce goods of a lower quality to decrease the price of the product. However, consumers who own information won’t buy such products as they are aware that their quality is inferior to competitors’. As a result, customers will switch to another brand that has the advantage — high-quality goods.
- Companies can easily enter and leave the market. Firms can enter the market without spending a lot of costs, time, and research. The same situation is when a seller wants to exit the market. It isn’t required to pay some significant costs.
Knowing the five characteristics above you can easily identify pure competition. However, there are still other market structures for you to consider. That’s why let’s proceed to the comparison of pure competition and monopoly.
Pure Competition and Monopoly
Pure competition and monopoly are two different market models that have something in common but are different by nature. Companies that find themselves in such market structures have identical cost and production functions and aim at maximizing their profit. Yet these two market models have some distinctive features.
In pure competition, there are many manufacturers who supply the same goods to the market. They can’t influence the market price as it’s defined by the total product supply and product demand. Due to a large number of sellers, it’s impossible to reach a general agreement among them so they work independently.
A monopoly occurs when there’s one manufacturer and many customers. Lack of economic competition and appropriate substitute products create a perfect environment for a monopoly. A single manufacturer has control over the price.
In a monopoly, the company that usually sells a distinctive product can set any selling price. Sellers set the price including the production costs and output so that they can receive a big profit. Also, companies-monopolists can restrict output to increase the selling price. Monopolists produce products for a higher price but lower quantity.
Now let’s review monopolistic competition and how it differs from pure competition.
Pure Competition vs Monopolistic Competition
In pure competition, there are many companies that manufacture standardized products since it’s very easy to enter such a market because it has no special barriers. In this market model, prices are defined by consumer demand and sellers don’t influence the market price.
The monopolistic competition combines some characteristics of a monopolistic market and perfect competition. There’s a large number of manufacturers and consumers where companies have only a certain degree of control over the market. Also, it provides businesses only with a few barriers to enter the market.
This market structure allows sellers to differentiate their products from other similar products to gain some profit. Manufacturers can do it in various ways using style, location, quality or specific brand name.
You can find the majority of consumer goods in this category. Suppliers do everything possible to distinguish their products by positioning them as high-quality products to justify higher prices or to increase market share. The monopolistic competition occurs only if there’s significant differentiation or if sellers can convince customers that their product is superior by using advertising or other promotion methods.
Let’s walk you through the examples to see how this market structure works.
Examples of Pure Competition
The majority of people assume that pure competition doesn’t exist in today’s world. This assumption is correct to some extent. Centuries ago when the main source of economic activity were commodities, pure competition may have existed. People could sell many homogenous products at their old fashioned markets. Yet now we live in a world where companies do their best to gain a competitive advantage. Although nowadays it’s really difficult to find some examples of pure competition, there are still a few of them.
Let’s take the agricultural industry, for example. Vegetables and fruits grown by farmers are all the same and can be called generic. Farmers buy land to grow different crops. Sellers can easily enter and leave the market if they want to.
Let’s take another market as an example — online shopping. As you know, the internet has many sellers and buyers. For instance, eBay. It has many distributors that sell the same products and customers ready to buy them. This enables consumers to collect necessary information about sellers that includes price, the features of the product, its quality and compare them to select the best one. It allows buyers to purchase the necessary product for a lower price.
So now you know the details of one of the main market structures — pure competition and can distinguish it when necessary. Besides, you know some features of market structures and can differentiate them.
Last Updated: 16.02.2022