The basic characteristics of Perfect Competition Economics Essay

The basic features of absolutely competitory market are, that several companies operate at the same clip ( which means no entry and issue barriers ) and merchandises are indistinguishable. Such competition leads the supply and demand, to find the monetary value of the merchandise ( house is a monetary value taker ) . Perfect competition can non be, because it demonstrates a absolutely elastic demand curve, for a house in the market ( no alteration in monetary value whatever units are sold ) . The curve below shows the graphical presentation of Perfectly Competitive Market. Perfect competition normally exists in market for unbranded goods normally, such as comestibles.

This above figure gives a long tally equilibrium place of absolutely competitory market ( demoing a house, doing normal net income ) . In instance, a house modifies its merchandise and additions a competitory advantage, it can be abnormally profitable but merely in short term, unless the merchandise is copied by the rivals or new entrants are attracted by the merchandise. This brings such alterations to the diagram for a short period of clip.

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Such as if a house introduces a pen with spy camera picture recording equipment, audio recording equipment and Usb memory in it. These new characteristics will distinguish it from others merchandises for a little period of clip, unless copied or a similar merchandise is introduced by its rivals. The 2nd figure shows the short term unnatural net income earned by a house for the invention of that sole pen.


Another market system is known as a monopoly. When, in a market, one house is the lone provider of a certain merchandise, or two big manufacturers agree to sell a merchandise at a certain monetary value ( steadfast becomes monetary value shaper ) , a monopoly occurs. Amalgamations and coup d’etats can besides ensue in the formation of monopolies. Monopolies use different methods, such as marauding pricing schemes, to maintain the competition at a dead degree in the market. To forestall a monopoly from happening, deregulating takes topographic point. Deregulation reduces barriers of entry for the houses, to come in into a certain market. This is a manner through which authoritiess are able to make competition in the markets, to take monopolies and supply people with low priced goods. The deregulatory authorization in the UK is known as “ Monopolies and Merger Commission ” . Monopoly can besides take to inefficiency, because the manufacturer is non much concerned about the cost of production, since consumer is bound to pay any monetary value charged to them. Sewage disposal is by and large a monopoly of local authorities organic structures.

Railway in India is a Government monopoly.

An oligopoly refers to such industry which is dominated by few big manufacturers. This refers to the construct of concentration ratio which explains that 3 to 4 ( little figure of big concerns ) houses hold the power for most of the gross revenues in the market. There are high barriers of entry into this market and monetary values are about stable because house ‘s behaviors are dependent on their challenger ‘s schemes consequently. Largely non-price competition is seen in this market. The car industry is one of the best illustrations of oligopolistic competition all over the universe.

The figure explains that demand curve in an oligopoly is non directly. If a house raises monetary value, the rivals will non follow the tendency, but if a houses lowers a monetary value to derive competitory advantage, its challengers will make the same to avoid the loss of market portion.


The theory of contestable markets was developed by William J. Baumol, John Panzar and Robert Willig ( 1982 ) . This theory describes a market in which there are few companies which operate like rivals to avoid the menace of new entrants. There are no barriers to the entry or issue from this sort of market, but still unreal barriers might be created by the houses which already exist, such as the usage of predatory pricing scheme. It is easier for the bing houses to derive competitory advantage by bettering their efficiency to kick out new rivals come ining the market. In such markets house can profit by placing country of higher added value and working them. There are no sunk costs in this market.

The airplane industry is one of the best illustrations of contestable markets.

Below mentioned characteristics differentiate the market structures exactly.







Contestable Market


to Entry

No Barriers

No Barriers

High Barriers

No Barriers


Large figure

No rivals

Few rivals dominate

Less rivals


of merchandises



Both same and different

( B )

In 1993, the air hoses industry in the EU was dominated by the 15 National bearers ( which were provinces owned and states- sponsored ) such as Air Italia ( Italy ) , Aer Lingus ( Ireland ) , British Airways ( UK ) , Air France ( France ) , Lufthansa ( Germany ) and etc. This market can be said as a natural monopoly because of high cost of planes and their care which was considered to be low-cost merely by the authoritiess. Second were the barriers erected by the authorities that to go between two finishs it was merely possible to hold one of the either air hose ( the air hose of the going state or the other of the state to get ) such as to go between Ireland and Italy a rider could merely do a pick between Aer Lingus or Air Italia. Therefore to go long distances people were bound to utilize these Air lines and pay whatever monetary value that was charged. This market deregulated, partly in 1987 and wholly in 1997 along with the competiton faced by the railroad webs.

Deregulation removed the barriers of entry in the market. Still in 1998, 75 % of the entire market of air travelers was held by the Flag- bearers. Subsequently in 2001, the Pie below shows the market place.

45 % shows the proportion of other low cost air lines. Rest are the national bearers with their market portion ( Lufthansa 12 % , British Airways 11 % , Air France 8 % and others ) .

Market was enlarged in 2004, by the connection of 10 more states to EU which as a whole had a population of about 70m. Europe in that epoch enjoyed the period of economic growing and development which lead to lift in existent incomes of people, promoting people to utilize more air travel.

All this raised competition and now in 2010, there are more air hoses runing in markets. This competition has eroded the laterality of National bearers and market portion has migrated towards more efficient and low cost air lines. This is because low cost air hoses charge an mean menu, which is merely 3 % ( about ) of the mean monthly pay EU industrial pay. The diagram below shows how addition in supply ( new entrants in air hose industry ) , drive a autumn in monetary value and addition in demand for the people utilizing flights for journey.

The new and lower cost air hoses these yearss are Flybe, Easy Jet, GO, Ryanair and etcaˆ¦These houses maintain monetary values low by utilizing smaller airdromes, utilizing less value added such as no distribution of nutrient during battles, doing gross revenues through cyberspace and etc. For illustration, Easy Jet makes 90 % of its gross revenues through cyberspace. There are 280 airdromes in Europe of which merely over 100 now have a low-priced service.

Though high cost itself is a really large hurdle to come in the market, but still to avoid any opportunities for come ining or endurance of new rivals, bing houses use hubs as barriers of entries now a yearss. Different air hoses use their market power to cut down their fringy cost at these hubs such as decrease in landing fees, care fee and other disbursals. The domination of a specific air hose at a hub forces the airdrome module to give them some competitory advantages.

A few illustrations are given below:

Ryanair ( London Stansted airdrome ) and

Flybe ( Southampton, Birmingham, Manchester and Belfast )

The national bearers besides dominate a few hubs such as:

Heathrow: British Air passages

Frankfurt: Lufthansa

Paris Charles De Gaulle: Air France

Government intervenes and keeps a position of the market to keep competition and intervenes when necessary, Such as Government intervened and crossed – boundary line between air hoses to unify such as Ryanair and Buzz, Easy Jet and GO to keep competition. The attractive force to these companies from amalgamations was deriving market power and portion ( laterality ) , economic systems of graduated table and deriving pricing powers which might take to monopoly formation in future. If these amalgamations take topographic point the figure below shows how houses can exert their market power to put monetary value.

Firms can put a monetary value below market equilibrium, to do it hard for rivals to last.

This can besides raise high barriers for a new administration to come in the market.

This manner the amalgamation companies can profit from a long term monopoly formation.

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