Chapter 9.1, Problem 5R

To determine

To discuss: The reasons for perfect competition to be a rare market structure.

Explanation of Solution

Perfect competition is considered a rare market structure because of its characteristics which states that homogeneous products are produced by every firm in the market but in the actual world the products produced by the firms are not identical. In fact, most of the firms follow the strategy of product differentiation to make their products more valuable and attractive for customers.

Perfect competition also assumes unrestricted entry and exit of firms in the market but in reality, there are several restrictions on the entry of new firms in the market, be it huge capital investment, state laws prohibition, strong brand value of the existing firms, patents or licenses, etc. So, entry and exits are not free in a real market.

Perfect competition says that since the products are homogeneous, therefore, they do not require to incur advertising costs but since, in the real market, products are differentiated and not identical so firms incur huge amount on advertisements to make their products reach a wide range of customers all over the country.

It says that each firm earns normal profits from the long-term point of view but in the actual world, due to the wide range of differentiated products, firms end up earning super normal profits or incurring losses in the long run.

Ideally, perfect competition does not exist in the actual world, it is completely a hypothetical situation but it is often a times, used as a base to compare other types of market structures.

Economics Concept Introduction

Introduction: Perfect competition is defined as the market structure where there are huge number of buyers and sellers in the market and produce homogeneous products; thus, no firm has enough capability to control the industry.