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PERFECT COMPETITION

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Definition:
Perfect competition is defined by four conditions (in a well-defined market):

a) There is such a large number of buyers and sellers that none can individually effect the market price. This means that the demand curve facing an individual firm is perfectly elastic.

b) In the long run, resources must be freely mobile, meaning that there are no barriers to entry and exit.

c) All market participants (buyers and sellers) must have full access to the knowledge relevant to their production and consumption decisions.

d) The product should be homogenous.

When these conditions are fulfilled in any well-defined market, the market is perfectly competitive; when they are fulfilled in all markets, the economy is perfectly competitive.

Context:
It is this definition of perfect competition which underlies the conclusion that a perfectly competitive economy is Pareto efficient. Under these conditions, the price of the goods produced equals marginal cost and all goods will be produced in the least costly way. It is evident that this notion of competition can be highly restrictive in terms of policy-making. Some economists have therefore argued that the goal of competition policy should not be perfect competition, but a more realistic target such as workable competition. Another drawback to the use of perfect competition as a policy goal is that it is not clear that perfect competition is desirable unless it can be achieved in all markets.

Source Publication:
Glossary of Industrial Organisation Economics and Competition Law, compiled by R. S. Khemani and D. M. Shapiro, commissioned by the Directorate for Financial, Fiscal and Enterprise Affairs, OECD, 1993.

Cross References:
Elasticity of demand (price)
Second best, theory of

Hyperlink:
http://www.oecd.org/dataoecd/8/61/2376087.pdf

Statistical Theme: Financial statistics

Created on Thursday, January 3, 2002

Last updated on Tuesday, March 11, 2003