1.0 What is Perfect Competition?
Perfect competition is said to exist in a market place when all firms face the highest or most complete degree of competition conceivable and all are price takers, meaning they can sell as much as they wish at the going market price but not any higher. But for this to happen, there are four conditions or assumption that have to be fulfilled to guarantee perfect competition.
First, there must be many sellers and none should be big enough to exert any discerning perceptible influence on the market price of its products, for example by increasing its product offering for sale.
Second, the goods sold must all be homogenous in nature and not differentiable, for example, in tomato farming, all farmers will have a homogenous product (that is tomatoes) unlike, car manufacturing where BMW offers differentiated products from Ford.
Third, there must be perfect information and knowledge of prices and qualities of each firm’s products in the market without any need for advertising. So if one farmer raises price, the well informed customers will simply leave and go elsewhere to buy tomatoes as they are homogenous.
Fourth, there must be no barriers to entry such as patents, licensing, as firms have complete freedom of entry and exit with no restrictions (Doyle, 2002; Duffy 1993, p107).
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