Distinctive features of the perfectly competitive model for goods and services and its implications for a business strategy aimed at enhancing profitability?
- Features of a perfectly competitive industry.
- Individual firms have no effect on the market price
- No barriers to starting and stopping production
- Products are identical
- Well-informed buyers and sellers
Above is a quote from John Sloman, which I feel is a concise way of defining perfect competition. Rather than being a market structure which we can meet in real life, the model of perfect competition could be seen as a completion of the categories of market structure, an ?anti-monopoly' situation.
To expand on this further, there is a very interesting point detailed by Sloman (p155), which is how the model of perfectly competitive firms does not experience ?substantial? economies of scale. This notion also explains why perfect competition is more of a concept than an actually-realised form of market. Once companies within an industry expand enough to achieve economies of scale, companies then implicitly gain market power due to their increased size, allowing them to produce and sell on more cheaply than their competitors. But this goes against the principles of perfect competition, which I will go on to explain. Therefore, that is why there are no perfectly competitive industries ? because in almost every type of industry there is the possibility for economies of scale. Sloman thinks that the closest market to being perfectly competitive is that for fresh vegetables, but for me, ?approximately? (p155) is not good enough.
[...] Begg, Fischer & Dornbusch (p166) explain this: use the term marginal value product of labour (MVPL) for competitive firms who are price-takers in their output markets? The above diagram is my own version based on a similar version by Ben Knight, (p10). Because of decreasing returns to labour, extra person hours will be marginally less productive. So a firm should only hire extra labour when the market wage comes down. At the market price the firm should employ Eh* person hours. [...]
[...] Thus, if a seller receives above the market price for a product, then they are not a price-taker, which then goes against the rules of perfect competition. I can now analyse how strategy has a role in enhancing profit in a perfectly competitive firm. The following diagram is based on ideas I gained from figure 10.4 and 10.5 from Katz & Rosen ?Economics' (pg305). But I have taken the ideas on those diagrams and re-drawn them myself, tweaking them slightly to serve my own purpose. [...]