Perfect competition: Difference between revisions
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'''Perfect competition''' is an [[imaginary construct]] (i.e. a set of false assumptions) used primarily in mainstream, neo-classical economic discourse to explain competition and monopoly in the economy. Firms under perfect competition are assumed to operate in a market characterized by a homogeneous product, an infinite number of buyers and sellers, the absence of any barriers to entry, and with access to perfect information.<ref name="causal_realist">[[Peter Klein]] [http://mises.org/media/categories/99/Fundamentals-of-Economic-Analysis-A-CausalRealist-Approach "Fundamentals of Economic Analysis: A Causal-Realist Approach"], 2007, Lecture 7 Competition and Monopoly.</ref> Under such conditions firms' demand curves would be perfectly [[elasticity|elastic]] meaning that they could bring any supply to the market without affecting price. Furthermore for a profit-maximizing firm operating in a perfectly competitive market price would be equal to marginal cost. Firms who are able to sell products at a price above marginal cost (i.e. firms with downward sloping demand curves) are assumed to operate under conditions of [[imperfect competition]] and thus possess market power.<ref name="causal_realist" /> | '''Perfect competition''' is an [[imaginary construct]] (i.e. a set of false assumptions) used primarily in mainstream, neo-classical economic discourse to explain [[competition]] and [[monopoly]] in the economy. Firms under perfect competition are assumed to operate in a market characterized by a homogeneous product, an infinite number of buyers and sellers, the absence of any barriers to entry, and with access to [[perfect information]].<ref name="causal_realist">[[Peter Klein]] [http://mises.org/media/categories/99/Fundamentals-of-Economic-Analysis-A-CausalRealist-Approach "Fundamentals of Economic Analysis: A Causal-Realist Approach"], 2007, Lecture 7 Competition and Monopoly.</ref> Under such conditions firms' demand curves would be perfectly [[elasticity|elastic]] meaning that they could bring any supply to the market without affecting price. Furthermore for a profit-maximizing firm operating in a perfectly competitive market price would be equal to marginal cost. Firms who are able to sell products at a price above marginal cost (i.e. firms with downward sloping demand curves) are assumed to operate under conditions of [[imperfect competition]] and thus possess market power.<ref name="causal_realist" /> | ||
==Criticisms of perfect competition== | ==Criticisms of perfect competition== | ||
Many economists have been | Many economists have been highly critical to the concept of perfect competition<ref name="Reisman_Platonic">[[George Reisman]]. [http://mises.org/daily/1988 "Platonic Competition"], 2005.</ref>, suggesting that the assumptions associated with the model do not correspond at all to the actual characteristics of real markets and when the assumption are dropped the model does not provide any useful conclusions about market behavior. For example it is pointed out that in reality there is no such thing as a perfectly elastic demand curve as all firms face a downward sloping demand curve and thus possess some "market power". Furthermore, the model of perfect competition has often been used as the benchmark for [[anti-trust]] policy, where policy makers maintain that it is the job of government to promote perfect competition. Thus policy makers misuse the model as a normative benchmark in deciding what anti-trust actions should be taken against firms.<ref name="causal_realist" /> | ||
==Perfect competition vs. actual competition== | |||
{{Main|Competition}} | |||
"Pure and perfect competition" is completely unlike anything one normally means by the term "competition." Normally, one thinks of competition as denoting a rivalry among producers, in which each producer strives to match or exceed the performance of other producers. This is not what "pure and perfect competition" means. Indeed, the existence of rivalry, of competition as it is normally understood, is incompatible with "pure and perfect competition." Consider the following passage in a widely used economics textbook by Professor Richard Leftwich:<ref name="Reisman_Platonic" /> | |||
"By way of contrast, intense rivalry may exist between two automobile agencies or between two filling stations in the same city. One seller's actions influence the market of the other; consequently, pure competition does not exist in this case."<ref name="Leftwich_Price">Richard H. Leftwich and Ross D. Eckert, [http://books.google.com/books?id=96S7AAAAIAAJ&q=intense+rivalry#search_anchor "The Price System and Resource Allocation"], 9th ed., The Dryden Press, Chicago, 1985, p. 41. Referenced 2011-11-17.</ref> | |||
==References== | ==References== | ||
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==Links== | ==Links== | ||
* [http://mises.org/daily/4181 The Meaning of Competition] by Friedrich A. Hayek (from [[Individualism and Economic Order]] (1948)) | |||
* [http://mises.org/journals/qjae/pdf/qjae5_2_4.pdf Austrian Economics, Neoclassical Economics, Marketing, and Finance] (pdf) by Walter Block, William Barnett II, and Stuart Woord, 2002 | |||
* [http://www.cato.org/pubs/journal/cj15n2-3-10.html Perfect Competition and the Transformation of Economics] a review by John B. Egger | |||
* [http://mises.org/journals/jls/4_4/4_4_6.pdf The Austrian Theory of Efficiency and the Role of Government] (pdf) by Roy E. Cordato | |||
* {{wplink}} | * {{wplink}} | ||
[[Category:Economic concepts]] | [[Category:Economic concepts]] | ||
{{Stub}} | {{Stub}} | ||
Revision as of 10:25, 17 November 2011
Perfect competition is an imaginary construct (i.e. a set of false assumptions) used primarily in mainstream, neo-classical economic discourse to explain competition and monopoly in the economy. Firms under perfect competition are assumed to operate in a market characterized by a homogeneous product, an infinite number of buyers and sellers, the absence of any barriers to entry, and with access to perfect information.[1] Under such conditions firms' demand curves would be perfectly elastic meaning that they could bring any supply to the market without affecting price. Furthermore for a profit-maximizing firm operating in a perfectly competitive market price would be equal to marginal cost. Firms who are able to sell products at a price above marginal cost (i.e. firms with downward sloping demand curves) are assumed to operate under conditions of imperfect competition and thus possess market power.[1]
Criticisms of perfect competition
Many economists have been highly critical to the concept of perfect competition[2], suggesting that the assumptions associated with the model do not correspond at all to the actual characteristics of real markets and when the assumption are dropped the model does not provide any useful conclusions about market behavior. For example it is pointed out that in reality there is no such thing as a perfectly elastic demand curve as all firms face a downward sloping demand curve and thus possess some "market power". Furthermore, the model of perfect competition has often been used as the benchmark for anti-trust policy, where policy makers maintain that it is the job of government to promote perfect competition. Thus policy makers misuse the model as a normative benchmark in deciding what anti-trust actions should be taken against firms.[1]
Perfect competition vs. actual competition
- Main article: Competition
"Pure and perfect competition" is completely unlike anything one normally means by the term "competition." Normally, one thinks of competition as denoting a rivalry among producers, in which each producer strives to match or exceed the performance of other producers. This is not what "pure and perfect competition" means. Indeed, the existence of rivalry, of competition as it is normally understood, is incompatible with "pure and perfect competition." Consider the following passage in a widely used economics textbook by Professor Richard Leftwich:[2]
"By way of contrast, intense rivalry may exist between two automobile agencies or between two filling stations in the same city. One seller's actions influence the market of the other; consequently, pure competition does not exist in this case."[3]
References
- ↑ 1.0 1.1 1.2 Peter Klein "Fundamentals of Economic Analysis: A Causal-Realist Approach", 2007, Lecture 7 Competition and Monopoly.
- ↑ 2.0 2.1 George Reisman. "Platonic Competition", 2005.
- ↑ Richard H. Leftwich and Ross D. Eckert, "The Price System and Resource Allocation", 9th ed., The Dryden Press, Chicago, 1985, p. 41. Referenced 2011-11-17.
Links
- The Meaning of Competition by Friedrich A. Hayek (from Individualism and Economic Order (1948))
- Austrian Economics, Neoclassical Economics, Marketing, and Finance (pdf) by Walter Block, William Barnett II, and Stuart Woord, 2002
- Perfect Competition and the Transformation of Economics a review by John B. Egger
- The Austrian Theory of Efficiency and the Role of Government (pdf) by Roy E. Cordato
- Perfect competition at Wikipedia