Pure competition is a term that describes a market that has a broad range of competitors who

are selling the same products. It is often referred to as perfect competition. Here are some
characteristics that define pure competition:

 In an ideal purely competitive market, the products being sold would be identical, which
removes the option of one seller offering something different or better than another
seller.
 Because there are so many competitors in the market offering the same product at the
same price, one competitor doesn't have an edge over the others. Essentially, all the
sellers are equal.
 New companies can easily enter the market.
 The price of products is determined solely by what consumers are willing to pay.1

Pure competition
Meaning:

Pure competition is a market situation where there is a large number of independent sellers
offering identical products. It means it is a term for an industry where competition is stagnant
and relatively non-competitive. Companies within the pure competition category have little
control of price or distribution of products.

Pure competition involves-

 Very large number

 Standardized product
 Price Takers
 Free entry and exit

A very large number– a very large number of independently acting sellers, e.g., farm product,
stock market, foreign exchange market.

Standardized product- Identical and homogeneous product. As long as the price is the same,
the consumers will be indifferent about which seller they buy the product from

The producer would not lower the price, since it will not earn anything by shrinking its profit.

Firms sell standardized products, they make no attempt to differentiate their products and do
not engage in other forms of nonprice competition.

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Any changes made to a product would result in a unified change throughout all firms because
one major characteristic of pure competition is that there is perfect knowledge of the product.

Price taker- Individual firm exert no significant control over the market price. Each firm’s
quantity is too small to affect the market supply or price.

Competitive are price takers, they cannot affect the price, but adjust to it.

None of the sellers can ask for a higher price.

None will sell at a lower price.

Increasing or decreasing of output of each firm will not perceptibly influence the total supply or
product price.

The individual competitive producer is at the mercy of the market

Free entry and free exit- New firms can freely enter and existing firms can freely leave the
market. No significant, technological, financial, or other obstacles prohibit new firms from
selling their output in the market.2
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CHARACTERISTICS

There are three characteristics of pure competition:

Large number of buyers and sellers:

There are a large number of buyers and sellers and no one can influence the price of the
commodity. A firm produces a small part of the total market output and as such a change in its
output will not affect the market supply much. The price is determined by the industry as a
whole. Therefore, a firm is a price taker rather than the price maker.

Homogenous products:

Homogeneity of the product refers to the “physical characteristics” of the product, such as
colour size, etc. and to the “environmental factors”, such as the location of the celler, credit
facilities, etc. The products are therefore indistinguishable from one another or are perfect
substitutes for one another. This implies that the firm can sell any amount of the product at the
prevailing price only.
Free entry and exit from industry:

The new firms are free to enter the industry and the existing firms are free to leave the
industry. There are no restrictions as such on the entry and exit on the firms. When the existing
firms make excess profits in the short run, other firms are attracted by it and enter the industry.

1. can sell all they can produce. In addition, selling unbranded goods makes it hard to
construct an effective advertising campaign.

2. There is maximum possible:

Consumer surplus

Economic welfare

3. There is maximum allocative and productive efficiency:

Equilibrium will occur where P = MC, hence allocative efficiency.

In the long run equilibrium will occur at output where MC = ATC, which is productive
efficiency.

4. There is also maximum choice for consumers.

1. happen without the company incurring huge publicity and advertisement expense.

Advantages of Perfect Competition 

1. They allocate resources in the most efficient way- both productively (P=MC)  and allocatively
efficient (P> MC) in the long run. 
2. There is no information failure as all knowledge is spread out evenly  
3. Only normal profits made just cover their opportunity cost
4. Maximum consumer surplus and economic welfare

Disadvantages of Perfect Competition

1. No Scope for economies of scale because of the high number of firms in there
2. Undifferentiated products- all homogeneous. Important in industries like clothes and cars
3. Lack of supernormal profits may mean the investment of Research and 4. Development(R&D)
is unlikely. Important for industries like pharmaceuticals.
5. With perfect knowledge there is no incentive to develop new technology because of the
ability to share information.- FREE RIDERS of info.

ADVANTAGES:

 Optimal allocation of resources

 Competition encourages efficiency
 Consumers charged a lower price
 Responsive to consumer wishes: change in demand, leads extra supply
DISADVANTAGES:

 Insufficient profits for investment lack of product variety

 Lack of competition over product design and specification
 Unequal distribution of goods and income
 Externalities e.g. pollution
The benefi ts
It can be argued that perfect competition will yield the following benefits:

5. Because there is perfect knowledge, there is no information failure and knowledge is

shared evenly between all participants.
 6. There are no barriers to entry, so existing firms cannot derive any monopoly power.

7. Only normal profits made, so producers just cover their opportunity cost.

8. There is no need to spend money on advertising, because there is perfect knowledge

and firms can sell all they can produce. In addition, selling unbranded goods makes it
hard to construct an effective advertising campaign.

9. There is maximum possible:

Consumer surplus

Economic welfare

10. There is maximum allocative and productive efficiency:

Equilibrium will occur where P = MC, hence allocative efficiency.

In the long run equilibrium will occur at output where MC = ATC, which is productive
efficiency.

11. There is also maximum choice for consumers.

Advantages of Perfect Competition

2. First and foremost advantage of perfect competition is that chances of consumer
exploitation are very low in case of this type of market structure because in perfect
competition sellers do not have any monopoly pricing power and hence they cannot
influence the price of the product or charge higher than the normal price from consumers.
3. Another advantage of perfect competition is that consumer get standardized product
irrespective of the place of purchase of product, so for example if a consumer is living in
city A and he or she travels to city B and he or she requires soap which normally has perfect
competition then consumer does not have to worry about quality of product because
product will remain same whether consumer purchase it from city A or city B.
4. Perfect competition is consumer-oriented market implying that consumer is king in case
of this type of market structure and sellers cannot displease the consumer because
consumer will quickly shift from one seller to another, hence as far as consumers are
concerned perfect competition market structure gives them pleasure of shifting from one
seller to another if they are not satisfied from the product or sellers services.

5. Another advantage of perfect competition is that it has very little or no advertisement

expense because products are homogeneous and if the firm keeps the price as decided
by market forces then sales will automatically

DISADVANTAGES OF PERFECT COMPETITION

1. The biggest disadvantage of this type of market structure is that there is no incentive for
sellers to innovate or add more features to the product because in case of perfect
competition profit margin is fixed and seller cannot charge higher than normal price which
is prevailing in the market because consumer will move to other sellers hence sellers keep
selling standardized product at price fixed by market forces of demand and supply.
2. Another disadvantage of perfect competition is that there are very few barriers to
entry implying that any firm can enter the market and start selling the product, hence old
firms cannot afford to be complacent because chances of losing market share to new firms
always loom over them.
3. In the case of perfect competition firm which has the best location is likely to generate
more sales then firm which is not located on prime location and hence location playing its
part rather than customer service of the seller or product features is a limitation in perfect
competition.

As one can see from the above that perfect competition has both advantages and
disadvantages, however in real life this type of market structure seldom exists because all
products cannot be homogeneous and there is slight difference even between perfect
homogeneous products which give sellers opportunity to charge differential price from
customers, hence in real-world perfect competition is rarely found.
CONCLUSION
Perfect competition market is considered theoretical and is only used mainly to benchmark
other existing market structures like the monopoly. The existing competition has differences
compared to a theoretical model of perfect competition market. Real firms differentiate their
products to earn a significant percent of market share. Firms reduce prices to attract customers
from their competitors. They increase prices of products to make more profit. However, some
firms are large capable to control the pricing in the industry. But the perfect competition market
is not ideal to be achievable in the real world.