Perfect competition
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 hostile 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 every 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 maker misuse the model as a normative benchmark in deciding what anti-trust actions should be taken against firms.[1]
References
- ↑ 1.0 1.1 1.2 Peter Klein "Fundamentals of Economic Analysis: A Causal-Realist Approach", 2007, Lecture 7 Competition and Monopoly.
- ↑ George Reisman. "Platonic Competition", 2005.