Pure Competition

Pure competition takes place in a market, where a very large number of interacting firms produce standardized homogeneous goods. In another words, it can be said that pure competition is economic model characterized by the idealized state of the market, where individual buyers and sellers can not affect the price, but contribute to the share of supply and demand. In these conditions, any firm can enter the market; there is no price control.

In the market of perfect competition, no single buyer or seller has even a little impact on the level of the current market price of the goods. Seller cannot ask for a price higher than the market’s one, as buyers are free to buy it for any amount of goods they need. In this case, first of all, it concerns the market of a particular product such as wheat (Robert, 2006). Secondly, all vendors offer the market the same product; however, buyer will be equally satisfied with wheat bought from different sellers. Thus, all buyers and sellers have equal and full information about market conditions. Third, the individual buyer or seller does not have any impact on the market.

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The mechanism of functioning of such a market can be illustrated by the following example. If the price of wheat increased as a result of increasing demand, the farmer will react to this extension of its crops next year. For the same reason, other farmers will sow large areas, as well as those who previously did not examine this. As a result, the increase in wheat selling could lead to a drop in the market price. If this happens, then all producers, and even those who do not expand the area under wheat, will encounter problems with its implementation at a lower price.

Thus, the market of pure competition is the one where the same price has been installed for the same product at the same time. It requires unlimited number of participants in economic relations and free competition between them. There is a free access to any economic activity of all members of society; the absolute mobility of production factors, unrestricted freedom of capital movement; market awareness of the absolute rate of profit, demand, supply etc.; implementation of the principle of rational behavior of market actors (the optimization of individual well-being as a result of revenue growth) is impossible without free information usage; absolute uniformity of similar goods (no brand names etc.); the lack of monopoly (the presence of the same manufacturer), monopsony (the presence of a single buyer), and non-interference in the functioning of the market. 

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However, there is the situation where all these conditions cannot exist. Therefore, there is a free and perfect market. Many real-world markets operate according to the laws of monopolistic competition. The topic of pure competition, its advantages and disadvantages is still highly discussable in the scientific world. Gregory Hame in his article “Strengths & Weaknesses of Pure Competition in Economics” tries to summarize the main ideas about pluses and minuses of pure competition for today’s economy. According to Hame, its main advantages are the following: it stimulates the development of the productive forces, scientific and technical progress, since an increase in profits by averaging the rate of profit in the economy can only be achieved by reducing production costs. Manufacturers with production costs above the average are going under, and below average became rich, thus, there is a kind of "natural selection" of the most competitive manufacturers. The winner of pure competition is consumer, because the separate commodity producers are forced to sell goods at not arbitrarily-determined price.

Gregory Hame also stresses that main limitation of the pure competition is connected to the understanding that the competition is a struggle for profits. As its main form is cost reduction, therefore, the main part of profit should be spent on the development of the technical basis of production, advertising etc. In addition, the bigger business is, the more competitive it is. Pure competition ceases to satisfy the interests of producers: having reached the highest stage of development, it turns into its opposite – a monopoly. In other words, pure competition is an objective monopolization.

The idea of failure of pure competition is supported by Damian Reece in his article “Why perfect competition is doomed to failure.” This article proves the statement that was mentioned before. and it is based on the opinion that pure competition can do worse than better for the country’s economy. It can be proven by the conclusion that was made after the analysis of the Damian Reece’s work: standardized products cannot satisfy the individual needs of the customers due to the issue that the industry operates very large number of manufacturers, which means a low level of concentration of production and the small scale of the individual enterprise. It means that there is no choice of implementing economies of scale and using high technology. The lack of economic profit in the long run means that firms do not have economic resources for investment and real development of production. In pure competition, there are economic losses and bankruptcy, which means that resources are spent in vain and did not receive public recognition. As a result, the company has a direct economic loss in the form of lack of resources in other sectors and production.

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Taking into consideration the observation of the theory of pure competition and the modern scientists’ opinions, it is necessary to stress that there is no answer to the question whether the pure competition will bring the economic boom or crises, and whether it will have good or bad consequences. In the conclusion, it is necessary to say that the pure competition with its advantages shows how the business should be done. However, its disadvantages make it possible to think about what can happen with this theory implementation.

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