What is Pure Competition?
Pure competition is a theoretical market structure where many manufacturers sell similar products in the market to the customer. This sort of market structure fosters fierce competition among individual players so all of them have an equal footing in the market.
There is no one single party that takes away a sizeable portion of profits. Instead, the profits are almost non-existent due to the state of perfect competition. Of course, the concept of perfect or pure competition is theoretical but some market places come close to exhibiting the structure.
Pure competition definition refers to a market that exhibits “competition that is unalloyed with monopoly elements”. So by nature, the idea of perfect or pure competition has no place for monopolistic competition.
Pure competition is considered the perfect market structure for democratic economies. So, pertaining to the idealistic nature, each individual company has equal stature in the market. No one or group of companies will have a strong hold on the market.
Characteristics of Pure Competition
Just from the definition, it’s difficult to grasp what a pure competition marketplace actually looks like. There are very particular operational elements that make a marketplace with perfect competition.
So to understand the defining features of pure competition, let’s list down its characteristics.
1. Many Competing Firms
One of the defining characteristics of pure competition is that it has many companies that compete with each other. It is essentially a large homogeneous marketplace with rules set up to encourage perfect competition.
Additionally, these firms are all price takers. That means they have absolutely no influence over setting prices. The normal parameters that contribute to price setting are all null. So now market share doesn’t influence prices. The firms sell their products at what is called an “equilibrium price” - maintaining the equilibrium of all firms getting the same outcomes.
2. Products are Identical
Another feature of pure competition is that all the competing firms sell the same product. For example, if a marketplace is selling clothes all the competing figures also sell clothes. But the interesting part is that the product they sell has very few unique features.
So the marketplace as a whole sells similar products - with little to no differences. This is why pure competition is known as a homogeneous market.
One example can be agricultural products. The market has many farmers selling their produce but they are more or less the same. Of course, in reality, the quality of one produce can be superior to others but that just points to the fact that pure competition is rarely perfectly portrayed in reality.
3. Equal Market Share
Consequently, since there are practically no differences in the offerings the firms all grab equal market share. There are no elements of competitive advantage whatsoever.
The overall marginal revenue is equal to the marginal cost - which is perfect equilibrium. So now, there is no room for companies to change the prices. Either way, changing prices will result in a loss.
4. Perfect Information
All buyers are fully aware that they can always switch to a different company that sells lower prices without receiving a lower quality product. They have perfect information about everything in the past, present, and future.
So this puts the companies in a place where increasing their prices will result in a loss in customers. If the businesses take a different route to reduce the quality of the product instead of increasing prices - the customers will also be aware of this change.
So either way, the idea of maintaining equilibrium is reinforced through this dynamic. “Perfect Information” plays an important role in maintaining this.
5. Perfect Competition Knowledge
As I mentioned earlier, there are no elements of competitive advantage in this structure. So any information, that in the normal setting, will work as a competitive advantage is essentially shared by everyone.
Take for instance the information about an industry’s internal working, data about consumer preferences, better implementation methods, knowledge about sourcing channels and distribution mediums - all this is very valuable for companies. It can be the key to a companies success or failure.
Since this information is homogeneously available to everyone there is no one party at an advantage or disadvantage. This allows them to produce near-identical products.
6. Easy Entry and Exit
The companies can very easily enter or exit the market without any financial consequences. There is no barrier of entry that most real businesses experience. For example, a lot of industries need upfront investment without which they cant take off.
There is no such element in a pure competition marketplace. Also, there are no restrictive parameters that will stop them from leaving the market.
Pure Competition VS Monopoly
Very simply put, a pure competition marketplace is exactly the opposite of a monopoly.
A monopoly is a market structure where a single company, firm, or manufacturer takes away a sizeable share of the market. It is practically impossible for comparatively smaller companies to compete with such an entity.
Monopolies not only take home a large portion of profits, but they also have a stronghold over all the operating channels of the marketplace. The monopoly has the power to set the base price and also heavily influences the price in the market.
It is essentially a market where economies are not delegated by any fair-competition principles and the firm with more power can steer the wheel where ever they wish.
If we directly compare a market with the pure competition or monopolistic competition - you’ll find that pure competition has a homogeneous structure with many sellers and buyers, where neither has any sway over the market price.
Whereas, monopolies have one seller with many customers and the one seller has a large influence over the price.
What is Monopolistic Competition?
Monopolistic competition is a market structure with a large number of manufacturers and consumers all competing to get a piece of market share. Due to fierce competition, the companies all strive to differentiate themselves from the competition. This means they grab on to any opportunity to gain a competitive advantage.
The consumer goods market is a good example of monopolistic competition. Here, the primary product remains the same, but the competition tries to create a different version of the product. The differentiators can just be the quality or even the style and other product attributes.
Examples of Pure Competition
It is a common belief that pure competition is an extremely theoretical concept and no real system can exhibit all of its characteristics. This is true to an extent but we can still consider a few examples to understand the concept better.
Let’s consider the agricultural industry. The industry is a good example of pure competition. It directly showcases some of its main characteristics. For example, the agricultural products sold are all the same. There are a large number of sellers and consumers. Plus there is a chance that a group of farmers might have equal profit margins, which is of course not true in cases where a farmer has some competitive advantage (better yield, more land, more influence).
Another market that somewhat exhibits the pure competition features is the online shopping market. For one, there are a huge number of buyers and sellers and for a single search result, you’ll find a lot of sellers selling the same products.
Consumers also have all the product and seller data to perform an informed purchase. This consumer information can include selling price data, different price comparisons, features of the products, quality info, and other information.
All-in-all now you understand how a pure competition marketplace works.