What are the features of a perfectly competitive market?
A perfectly competitive market refers to a market which adheres to certain criteria, and is used to benchmark how competitive our current markets are. We make a few assumptions when observing perfect markets, most notably we assume all firms want to maximise profit.
In a perfectly competitive market products must be homogonous, this means products are identical. This is very important, introducing brand names, or labelling a product organic will interfere with the price. This encourages producers to price “fairly”, which should lead to an increase in consumer welfare.
Another feature of a perfectly competitive market is labour mobility; this means if an increase in demand for a good occurs, then people can produce it. This means they must be able to get to work (transport), and if need be, relocate (affordable housing).
It is important that there are no barriers to entry or exit of a market, barriers to entry can cause monopolies to occur (single seller markets). This could be in the form of legislation, high start up costs, and predatory pricing. Another barrier to entry is health and safety, the training involved, takes time and is a cost. Barriers to exit could be in the form of legislation, for example workers benefits and pensions, it may be cheaper to let the business struggle on, instead of getting rid of workers/replacing workers to produce a new product. Another barrier to exit is high “sunk costs”, costs that cannot be recuperated, an example of this is the nuclear power industry, the cost of decommissioning a factory is immense.
Another feature is perfect information; all consumers must know about all suppliers, the prices must be clear, as must the contents. This allows consumers to make the best choice when deciding between producers.