Perfect competition is a theoretical market model that exists when there are a large number of sellers, easy to enter and exit the market of identical products, and sellers are price takers. True perfectly competitive markets do not exist in real life. This theoretical model, however, helps to give us a standard for comparing various market situations. Businesses in a perfectly competitive market are competing at the highest possible level. The market structure is such that there are many buyers, as well as many sellers. Also, each business is producing identical products and confront very few obstacles upon entering or exiting the market. Basically, a perfectly competitive market is the standard of comparison for evaluating the economic concepts of supply and demand.
In a perfectly competitive market, buyers and sellers are free to enter or exit the market as they wish. You are neither forced into nor prevented from doing business as you see fit. Therefore, all transactions are entirely voluntary. No one is forced to buy or to sell anything. Perfectly competitive markets exemplify the right to be free of intimidation, the right to buy or sell only what is freely consented to. Because of this, perfectly competitive markets are perfectly moral in three ways. They safeguard the rights of buyers and sellers to have freedom of opportunity, voluntary consent, and freedom from coercion.
Perfect competition is a useful model to measure your business potentials in an existing market and to understand how your approach differs from other businesses. By departing from the conditions present in a perfectly competitive market, you will gain competitive advantages and higher profits.
Not all products are the same so that some businesses can charge higher prices for better quality. Your ability to create a product that is more desirable due to it being set apart from the others will yield your business higher profits, as you will be able to charge a higher price.
In real life, the market situation is such that a few influential buyers and sellers dominate the ability to move prices. Naturally, you will gain higher profits by being one of the few sellers that provides a specific product to a large number of buyers.
Much of the market information is confusing to the average buyer, and not easily accessible. Buyers have to spend much time to obtain accurate and reliable information. Most buyers do not have the time to invest in such research, and instead, make their decisions based on others recommendations and reviews. If you can gain a base of loyal customers, your business will have an excellent foundation for success.
The overall cost structure for each business is varied. The diverse access to production technology and various input costs results in unequal business advantages. If you can gain access to superior technology and low-cost materials, you can generate high profits even when other businesses are making little to no profit.
In our current market, your established business has many advantages over new enterprises. For example, you have the experience necessary to maintain lower production costs, as well as the benefit of having an established loyal customer base. New businesses do not have these benefits, which makes entering into the industry difficult. Exit costs are also substantially high in most cases, which can force companies to remain in the industry even when they are not making a profit.
These are all critical aspects to consider when planning your strategy for the continued success of your business. While there are many other factors to consider, these basic concepts will serve you well. You are encouraged to use them prudently to ensure rising profits in today’s market structure.