Perfect competition market models and analysis in real-world industries

Perfect Competition

In the economic discipline the market mechanism provides the underpinning of "the basic rules of behavior that no participant in a market system can afford to disregard entirely" (Heilbroner, R. 1995). Adam Smith in describing the laws of the market in The Wealth of Nations did not specifically articulate the concept of perfect competition, but did rely on competition as one of the fundamental regulators of the marketplace for goods and services. The abstraction of the perfect competition model did not elude another giant of economic thought, Karl Marx who in Das Kapital utilizes a perfect competition model to portent the ruin of capitalism. The "world of perfect capitalism: no monopolies, no unions, no special advantages for anyone…for if proven that the best of all possible capitalisms is nonetheless headed for disaster, it is certainly easier to demonstrate that real capitalism will follow the same path, only quicker" (Heilbroner, R. 1995). But what exactly is this model of perfect competition? What are its attributes? And what markets in the modern economy prescribe to its rules?

Characteristics of Perfect Competition

A perfectly competitive market is one that demonstrates five attributes: all firms sell an identical product, all firms are price takers, all firms have a relatively small market share, buyers know the nature of the product being sold and the price charged by each firm, and the industry is characterized by freedom of entry and exit" (Investopedia. N.D.).

In order to explicate these concepts further, the market for skim milk will be analyzed.

Identify the Buyers and Sellers as well as the Goods and Services

It is necessary to distinguish the various buyers and sellers in this market. In the area in question there are literally hundreds of farmers who produce and supply milk to the marketplace. There are likewise hundreds of retail outlets: grocery, convenience, and big- box stores which purchase milk and sell it to consumers. These stores are buyers and sellers, purchasing from the farmer and subsequently selling milk to the consumer. Finally there are thousands of consumers who purchase milk from these outlets.

How Closely do Real World Conditions Match the Characteristics Listed in the Model?

The farmers who produce and sell skim milk are essentially selling the identical product. In essence "the goods produced by one supplier are good substitutes for those offered by another seller" (Drexel University. N.D.). The same can be said for the retail sellers of skim milk as their offerings are "homogenous products" (Drexel University. N.D.).

In the case of the farmer who sells skim milk, the retailer who sells skim milk, and the consumer who purchases skim milk, all are price takers. Succinctly, "because buyers and sellers in perfectly competitive markets must accept the price the market determines they are said to be price takers" (Mankiw, G. 2004).