Economics Made Economical

Tip Of The Day #5: Perfect Competition

Perfect Competition, the ultimate goal of any capitalistic society, is a when a given industry offers society so many competing options producing the same good that the businesses in the industry make zero long-term net profit. It can be thought of as the polar opposite of a monopoly. One of the most perfectly competitive markets in the U.S. economy is the restaurant industry. Restaurants often come and go, change management, change menus and recipes, and there are usually various other alternatives to dining at any one particular restaurant that we can choose from. Perfect competition keeps prices at their lowest possible levels and is economically the most efficient type of market that benefits society as a whole most strongly.

Requirements for a perfectly competitive market include:

  • Limited or no barriers-to-entry enabling any citizen who so chooses to enter into the market with relative ease (cable providers, for example, are an industry with an extremely high barrier-to-entry that prohibits the average American from starting his or her own cable company);
  • Overwhelming choice of competing businesses offering extremely similar, comparable, or easily substitutable goods (think Burger King, McDonald’s, Wendy’s, etc);
  • Free and fair access to the general public about their choices within the industry, and easily disseminated and accessible information (think the Republican and Democratic political parties often portraying themselves as an American voter’s only two options and the lack of a general awareness about third parties);
  • Relative affordability to enter into the market;
  • Various businesses within the market being equally accessible or available to everybody;
  • The market having high elasticity of demand;
  • Collusion and cartel-like behaviors being prohibited within the market (OPEC is an example of a cartel in which 8 or 10 nations agree to fix the supply of oil and collude to control its market value, rather than the various nations competing with each other fairly–collusion is illegal not just according to U.S. law but according to standard international antitrust law as well);

In theory all markets in a capitalistic society for all goods and services, including the market for government and elected leaders, should be perfectly competitive at all times. In practice, this is difficult to achieve especially without strong government regulation, and strong enforcement of that regulation, in place.

Many industries are all but impossible to make perfectly competitive, the international fossil fuels market being one such example. The cable service, phone service, and internet provider industries are also practically impossible, at present, to be made perfectly competitive. Big box companies are notorious for demolishing perfect competition across many markets simultaneously by using anti-capitalistic tactics such as price gouging and long-term pressure to bankrupt their smaller competitors.

Abstract economic markets such as health care, the environment, pollution, nature, animal welfare, human life and human safety, politics, war, human trafficking, art, even rare metals and gemstones are also impossible to ever make perfectly competitive, which is why there is often strong government intervention within these markets. Most people cannot put a monetary value–or at least not the same monetary value as anyone else–on a human life, protecting a species from extinction, a piece of art, receiving medical treatment for a life-threatening condition, fresh air, natural parkland, clean water, etc, so the government is obligated to regulate a monopolist’s potential exploitation or destruction of these markets to the detriment of everyone else.




    1. Tip of the Day #7: OPEC « Econoblog
    2. The Sin Tax: Why It’s Pro-Liberty and Pro-Capitalist « Econoblog
    3. Is Ron Paul a Serious Contender? « Econoblog
    4. Tip of the Day 10: What Is Efficiency? « Econoblog
    5. Ron Paul’s Numbers Continue To Plummet « Econoblog
    6. FCC Presents Congress With Net Neutrality Regulations « Econoblog
    7. Supply and Demand « Econoblog
    8. Tip of the Day: Elasticity « Econoblog
    9. Even More Benefits of the Fair Tax « Econoblog

    Your Thoughts?

    Fill in your details below or click an icon to log in: Logo

    You are commenting using your account. Log Out /  Change )

    Google+ photo

    You are commenting using your Google+ account. Log Out /  Change )

    Twitter picture

    You are commenting using your Twitter account. Log Out /  Change )

    Facebook photo

    You are commenting using your Facebook account. Log Out /  Change )


    Connecting to %s

    %d bloggers like this: