Markets That Resemble

Perfect Competition

Examples taken in order from lower resemblance to higher

resemblance

Introduction

It is based upon 5 unrealistic assumptions that do not reflect the actual economy.

The 5 assumptions of perfect competition are:

• There are a large number of buyers and sellers in the industry and all have such a small market share that they cannot influence the market. This means every firm and consumer is a price taker.

• All goods are identical (homogenous)

• There are no barriers to entrance or exit of the market.

• Consumers have perfect information.

• All firms have equal access to resources and technology and there is constant or decreasing returns to scale

Why Does Perfect Competition Doesn’t Exist

In Real World

• These five requirements rarely exist together in any one industry. As a result, perfect competition is rarely (if ever) observed in the real world.

• When a product does come to have zero differentiation, its industry is usually consolidated into a small number of large firms, or an oligopoly.

• Many industries also have significant barriers to entry, such as high start up costs (as seen in the auto manufacturing industry) or strict government regulations (as seen in the utilities industry), which limit the ability of firms to enter and exit such industries.

Perfect Competition: Markets With Lower

Resemblance

• Food and Beverage Industry

Similarities With Perfect Competition

• Large number of buyers and sellers

Contd…

• Free Entry & Exit

Limitations

• Differentiated products

Automobile Industry

Journey of Automobile Industry to Perfect

Competition

Earlier Indian Automobile Industry- The

Oligopoly Market

A few facts:

• First car ran on India’s roads in 1897

• Till 1930, cars were imported in India

• Indian automobile firms started forming in 1940s

Contd…

• Hindustan Motors: the first Indian Car company to start production in

India- founded in 1942 by Mr. B.M. Birla; Ambassador- the flagship car

• Establishment of other car manufacturing companies like Premier

Automobiles(1944); Premier Padmini- the flagship car, now also used for

cab services

• Sanjay Gandhi owned Maruti Technical Services Limited which was

liquidated

• After his death, Indira Gandhi collaborated with Suzuki Motors, a Japanese

firm, for collaboration- Formation of Maruti Udyog Limited and renamed

later Maruti Suzuki in 2007

The Causes of Transformation- The First Big Step

Effects of the Transformation

• New firms, including foreign players, entered with modern engineering,

efficient processes and modern shop-floor layouts

• Indian automobile industry grew at 14.31% per annum in post-1991 era

compared to 8.56% per annum during 1985-91

• Delicencing of sector attracted many major Global OEMs (GM, Ford,

Hyundai, Honda etc.) to start assembly in India

• Free Entry & Exit

• Large no. of buyers & sellers

Automobile Industry in Perfect Competition

Limitations

• Product Differentiation

• Price Differentiation

Perfect Competition: Markets With More

Resemblance

Agriculture

Agriculture: Bringing Us Closer To Perfect

Competition

• Large number of buyers and sellers

• Price Taker

• Homogenous Products

• Transactional Costs

Limitations Of Agriculture As Perfect Competition

• Food processing companies, large distributors, grocery stores

• Barriers to Entry

Internet

Internet With Respect to Perfect Competition

• Number of buyers and sellers

• Perfect and complete information

• Mobility

• Free Entrance

Limitations

• Price Dispersion: It is variation in price across sellers of the same item,

holding fixed the item’s characteristics

Perfect Competition: Markets With Most

Resemblance

Foreign Currency Markets

What are foreign markets?

• What happens in a forex market is that currencies trade with each other, that is, a dollar can be used to buy a Euro and vice versa.

• Trading between currencies is actually based on their relative value, which is, more often than not, a reflection of the strength of that particular country’s economy.

• In a typical forex market is that a person buys a given amount of one currency by paying a given amount of another one basing on the relative value of the two currencies. For example, assuming that the value of a pound against a dollar is 2, which is to say that one sterling pound costs two dollars, one will have to pay two dollars in order to get one Sterling pound in a typical forex market.

Forex Market Closest To The Idea Of Perfect

Competition

• Many buyers and sellers meet openly to determine prices: There are large numbers of buyers and sellers - each of the major banks has a foreign exchange trading floor which helps to "make the market“.

• Currency values are determined solely by market demand and supply factors.

• Most buyers or sellers are well informed with access to real-time market information and background research analysis on the factors driving the prices of each individual currency. Technological progress has made more information immediately available at a fraction of the cost of just a few years ago.

• Homogenous output: The "goods" traded in the foreign exchange markets are homogenous - a US dollar is a dollar and a euro is a euro whether someone is trading it in London, New York or Tokyo.

Limitations of Currency Trading As Competitive

Market

• Market can be influenced by official intervention via buying and selling of

currencies by governments or central banks operating on their behalf. There

is a huge debate about the actual impact of intervention by policy-makers in

the currency markets.

Jewellery Market

• There are a large number of names in the Jewellery retail industry, the number of

buyers also are very huge.

• The output which is put of for selling is somewhat homogenous, as the core metal

is same, i.e., gold, silver, platinum or any other.

• It is easy to enter the Jewellery retail industry as there are no strict barriers

governing it.

• All the major players can be assumed to have the technological know how, as every

now and then they come with new techniques to woo the consumer base

Limitations of Jewellery Retail As Competitive

Market

• There is no way through which it can be found that the buyers have the

perfect knowledge about the products.

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