Perfect competition (also called pure competition) is a market structure in which (a) large number of participants sell and buy standardized products, (b) there are no barriers to entry, (c) an individual firm has no control over the price, and (d) there is no non-price competition (such as advertising, etc.)
In a perfect competition buyers are indifferent between different producers becuase the products produced by each seller has the same quality and features. New firms can enter the market without any resistance from existing firms. The presense of large number of buyers and sellers disables any single buyer or seller from setting the market price.
In a perfect competition, firms are price-takers because they are contrained to sell their product at the market price prevailing at the time. The market demand curve is a horizontal line. This is bacuase even a slight increase in price by single firm above market price will motivate buyers to purchase the product from other firms and the sales of the pricing increasing firm will reduce to zero. For each firm, marginal revenue is equal to the current market price.
Sucrose Farms is a business engaged in cultivation of sugar cane in Agraria. There are some 250 firms engaged in cultivation of sugar cane and some 50 crushing units that use sugarcane as a basic manufacturing input. A firm can start or stop cultivation without any interference from outside. They sell their produce through their direct marketing efforts instead of advertising.
The market seems a good example of perfect competition. Existence of 250 producers and 50 buyers means no party has the ability to set the market price. Sugar cane is a standardized product and there is minimal non-price competition. All this satisfies the definition of perfect competition.
Written by Obaidullah Jan, ACA, CFA and last modified on