Competitive Market

Article byAswathi Jayachandran
Reviewed byDheeraj Vaidya, CFA, FRM

What is a Competitive Market?

A competitive market is a market structure where competition is at the highest possible level. It is otherwise known as a perfectly competitive market and possesses many buyers, homogenous products, free entry, exit, etc. The structure shows perfect competition, and no single entity dominates over the market conditions.

With this structure, businesses will continue to achieve normal profits to competitive pressures while maintaining low prices. The ideal market structure, known for its perfect characteristics, exists in theory only. The existence of such markets is hardly possible. However, it is useful as a factor of comparison with other forms of market structure.

Competitive Market Meaning

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Key Takeaways

  • A competitive market exists as a result of consumer demands. They are a market structure where competition between various companies is at its highest. There are four types of markets: perfect competitive, monopoly, monopolistically competitive market, and oligopolistic.
  • A perfectly competitive market has free entry and existing firms. They sell homogenous products, and the sellers are price takers.
  • The perfect market system, recognized for its flawless attributes, only exists in theory. Such markets are hard to conceive of existing. However, it serves as a benchmark for comparison with other market structure types.

Competitive Market Explained

A competitive market forms as a result of consumer demands. Competition for goods and services arises to gain customers, forcing businesses to evaluate (and improve) production costs, price structures, quantity, and quality. As in any market, the forces of demand and supply play a major role in this system. However, in a competitive market, there is no single consumer or producer who controls or influences the market. In a market with perfect competition, several factors determine market supply and prices. In this system, manufacturers who compete for customers accept the market price rather than setting it because doing so could result in a loss of business.

The goal of a competitive market is to establish the best circumstances possible. This way, both the buyer and the supplier profit from the sale of goods or services. Since only a few buyers and sellers exercise control compared to the size of the market as a whole in competitive markets, neither has a significant direct impact on the market. Competitive marketplaces strive to offer homogenous items and eliminate entry barriers.

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Other market structures

Other market structures that exist are monopoly markets, monopolistic competition, oligopoly markets, etc. A monopoly market is where a single firm or business enterprise produces a product or offers a service with no substitutes. They fix the price and are, therefore, the price-makers, not the price takers. In addition, they have the liberty to change prices to increase profits. Thus, businesses profit from product differentiation in a monopolistically competitive market. Monopoly can be seen in the United States postal service, for example.

Clothing, food, and related consumer goods are examples of industries that experience monopolistic competition. Because customers do not regard the products as perfect alternatives, firms in monopolistic competition have more power over price than firms in perfect competition. In an oligopoly market, most of the entire output is produced by a few players. For example, Apple and Google are major companies in the manufacturing of operating systems for smartphones. Fewer enterprises are competing with them because of high capital requirements or similar causes.

Examples

Check out these examples of a competitive market:

Example #1

Farm produce:

Agriculture helps in growing produces. In this market, farmers are the price takers. Also, the food produced across the market will have the same price set for the produce. This is because they sell the harvests at market rates, which are determined by the market forces: supply and demand alone.

Example #2

Internet companies:

Online shopping and e-commerce companies can be expressed as being in perfect competition concerning consumer awareness. The internet allows consumers to browse and find better deals, compare products, and read reviews about them. Sellers provide the necessary information, and consumers analyze them before choosing. Due to this, different companies cannot charge prices with enormous differences. This feature of the industry makes it a part of perfect competition.

Characteristics of Competitive Market

Given below are some perfectly competitive market characteristics:

Characteristics of perfect competition

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#1 – The number of buyers and sellers:

There are a large number of buyers and sellers. The sellers here are usually small firms that are incapable of controlling prices in the market. 

#2- Homogenous products:

These firms and businesses manufacture products similar to goods present in the market. This ensures a normal rate of profit for them.

#3 – Free entry and exit of firms:

No rules and regulations restrict firms from entering the market or commencing business. Similarly, the closure of a company is also easy.

#4- Advertising cost:

As long as there is an existence of homogeneity and a normal rate of returns, firms will not find it viable to spend more money on advertisements.

#5 – Consumers have perfect knowledge of how the market functions:

Consumers are knowledgeable and are well aware of the functioning of the market. They understand if there are any changes in the market.

#6 – A large number of buyers and sellers:

All the factors of production, labor, capital, land, and enterprises have perfect mobility in the market and are not influenced by market factors or market forces.

#7 – Government intervention:

The making or selling does not affect third parties and therefore requires no regulation from the government.

#8 – Transportation costs:

Transportation costs here are cheap and efficient.

#9 – Normal profits:

Each firm or business earns normal profits. But, as these firms are price takers, no firm can make super-normal profits.

#10 – Price taker:

Each business is a price taker. It assumes that the forces of supply and demand determine the price. Therefore, any company cannot influence the product’s price.

Equilibrium

When a company’s output level is stable, it is said to be in equilibrium. Both expansion and contraction are not necessary at this state. In other words, firms hope to realize their highest possible profits by balancing their marginal costs with their marginal revenue, or MC = MR.

In a perfectly competitive environment, Market demand and supply will be equal at equilibrium. At this point, a company’s price will be established or determined. While demand will influence equilibrium in the short term, the equilibrium under perfect competition will eventually be impacted by both the supply and demand of a product in the long run. As mentioned earlier, a company will only see a regular profit at the equilibrium point in the long run.

Frequently Asked Questions (FAQs)

Who is a price taker in a competitive market?

In a perfectly competitive market, the producers or sellers are price takers. When the market forces such as demand and supply determine the prices, these sellers take that price and sell their goods and services at that rate.

What is an imperfectly competitive market?

A monopolistic market is otherwise known as an imperfectly competitive market structure. Here, organizations sell products that are not homogeneous. Producers in the imperfectly competitive market do so to sell more products and profit from innovation.

What are the features of a perfectly competitive market?

The free entry and exit of firms and the existence of homogenous products are two of the main features of the perfect market.

What is competitive market analysis?

Competitive market analysis is a type of market intelligence. Gathering data on various competitors is a necessary step in the process. In a competitive analysis of product lines and value propositions, the company’s marketing strategy, branding, marketing tactics, sales performance, brand equity, etc., are analyzed.

This has been a guide to the Competitive Market and its definition. We explain the competition, examples, characteristics, and equilibrium. You may learn more from the following articles –

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