What Is Perfect Competition?

Perfect Competition Definition

Perfect Competition is an idealistic economic theory that asks what a market structure with full equality between sellers and fully informed consumers would look like.

Perfect Markets

In order for a market to be described as exercising perfect competition, the following characteristics must be present.

  • Businesses sell one product, and every product is the same.
  • Price is not influenced, increased or decreased, by a business or a business’s market share.
  • Consumers have expert knowledge of the product being sold and the prices they are being sold at.
  • Entry/Exit into the market is free, and labor resources are perfectly mobile.Meaning workers and other production inputs are easily obtained, and free to move from business to business resulting in an abundance of able sellers.

Imperfect Markets

A perfect competition market is of course, as mentioned above, only an ideal and does not exist in the real world.

As a result, real markets, those that do exist in this world are rightly classified as imperfect markets.

Given that they, in some shape or form, do not comply with one of the above requirements.

An example of an imperfect market today, is the airline market.

In which only a few, government approved sellers may participate.

Monopolies

Markets that do not comply with any of the above requirements, rather than labeled as imperfect, are classified as monopolies.

As a result, perfect competition markets and monopolies are often juxtaposed as theoretical opposites.

Even though, for all intents and purposes, monopolies have moved beyond the bounds of the theoretical.

Prominent examples including Rockefeller’s Standard Oil Co.

Example of Perfect Competition

If there is any example of a market that comes close to perfect competition it is found in farming.

A market in which there are a large number of buyers and sellers, little difference between products, and prices that remain largely unaffected by market share.

However, entry into the market is not free and the labor needed to do so is not entirely mobile since a certain level of experience and expertise is needed in order to be successful.

Therefore the market as a whole, is still far from perfect.

What Is Perfect Competition FAQs

Perfect Competition is an idealistic economic theory that asks what a market structure with full equality between sellers and fully informed consumers would look like.
A perfect competition market is of course, as mentioned above, only an ideal and does not exist in the real world.
Real markets, those that do exist in this world are rightly classified as imperfect markets.
Perfect competition markets and monopolies are often juxtaposed as theoretical opposites.
If there is any example of a market that comes close to perfect competition it is found in farming. A market in which there are a large number of buyers and sellers, little difference between products, and prices that remain largely unaffected by market share.
True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True contributes to his own finance dictionary, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.