The paper 'Perfect Competition Issues' is a great example of a Management Essay. The ideal of perfect competition is a theoretical concept that has been used as the core paradigm of economics from the start of the neoclassical period. According to the theory, the five standard features of a “ perfectly competitive” market include a large number of small traders, minor barriers to market entry and exit, homogenous products, “ perfect information, ” and price-taking firms (see Arnold, 2001, p. 501 for a typical presentation of these characteristics). However, competition is undoubtedly imperfect in various markets such that, in many cases, the assumptions presented by the theory cannot be applied in reality.
For instance, theoretically, perfect competition necessitates the assumption that individual buyers should not possess any market power (or prohibits monopsony power); however, this assumption can only be acceptable in a setting where there are infinite numbers of traders. In this regard, the practical usefulness of “ perfect competition” is dependent on proving that it is an appropriate approximation for markets, where the number of traders is finite. However, it is not easy to simulate or create perfectly competitive markets with a finite number of agents.
Such are the complexities inherent in the theory of perfect competition. In general, to understand any concept or theory, it helps to concretize what the concept or theory means or infers in reality. Through this method, an individual is able to see or prove whether the theory or suggested model is relevant according to the facts, or whether that theory or model is illogical and meaningless. Consequently, by concretizing “ perfect competition, ” this paper attempts to show that the concluding relates to it.
This critique of perfect competition is centered on criticisms offered in The Meaning of Competition extracted from the book Individualism and Economic Order by Friedrich A. Hayek. In addition, the paper will reflect on the types of competition that are likely to occur in a perfectly competitive market. Concretizing “ perfect competition” Accordingly, to concretize the theory it is vital to consider the five assumptions or standards projected by the theory. The first assumption suggested in the model is product homogeneity so that there is no competition in terms of product differentiation in quality and style.
This implies that for the perfect competition to exist in the market, companies should not attempt to make their product dissimilar from or superior to their competitors’ products. As a result, this idea of “ competition” essentially disregards one key characteristic of competition. Moreover, following this assumption, existing products would lack variety in such a market (the “ perfect market” ). Conversely, in the real marketplace; competition has the exact opposite effect, whereby, products must be differentiated to gain competitive edges over rival organizations. The second characteristic suggested by the theory is that industries should contain large numbers of small organizations so as to ensure that they are perfectly competitive.
As such, this eliminates positive competition among firms to decline their costs and acquire a competitive edge over their competitors through the realization of economies of scale. In retrospect, this is invariable, one of the most forceful features of competition in the real marketplace. Consequently, if all industries contained large numbers of small businesses, then production costs in various industries would be higher, this would result in declined productive ability and ultimately, lower standards of living.
Again, this is the precise contradictory outcome that is accomplished by competition.
Work CitedHayek, Friedrich A. . "The Meaning of Competition." 15 March 2010. Mises Daily. 09 Dec 2012