Market Characteristics - Competition to Monopoly

MARKET CHARACTERISTICS - COMPETITION TO MONOPOLY by Clair Wilcox The Nature Of Competition Competition has many different meanings. The term always denotes the presence in a specific market of two or more sellers and two or more buyers of a definite commodity, each seller acting independently of every other seller and each buyer independently of every other buyer. But the term usually carries a further connotation. There is perfect competition, pure competition, imperfect competition, monopolistic competition, nonprice competition, oligopolistic competition, cutthroat or destructive competition, predatory and discriminatory competition, unfair and fair competition, potential competition, and effective or workable competition. Each of these concepts will be examined in turn.

Perfect Competition

The requirements of perfect competition are five: First, the commodity dealt in must be supplied in quantity and each unit must be so like every other unit that buyers can shift quickly from one seller to another in order to obtain the advantage of a lower price. Second, the market in which the commodity is bought and sold must be well organized, trading must be continuous, and traders must be so well informed that every unit sold at the same time will sell at the same price. Third, sellers must be numerous, each seller must be small, and the quantity supplied by any one of them must be so insignificant a part of the total supply that no increase or decrease in his output can appreciably affect the market price. Buyers likewise must be numerous, each buyer must be small, and the quantity bought by any one of them must be so insignificant a part of the total demand that no increase or decrease in his purchases can appreciably affect the price. Under these circumstances, the seller who sets his price above the market level will sell nothing and the seller who sets his price below this level would get all of the business were it not for the fact that he lacks the capacity to handle it. No seller will be able to get more than the market price; no seller will need to take less, since he can sell at the prevailing figure whatever quantity he is equipped to produce. Each seller will therefore take the market price as given and ad

just his output to it, carrying production up to the point where the cost of producing an additional unit will equal the income that can be derived from its sale. Similarly, since no buyer will be able to obtain a supply at a figure below the market price and no buyer will need to pay more than the market price to obtain whatever quantity he desires, each buyer will take the price as given and adjust his purchases to it. Fourth, there must be no restraint upon the independence of any seller or buyer, either by custom, contract, collusion, the fear of reprisals by competitors, or the imposition of public control. Each one must be free to act in his own interest without regard for the interests of any of the others. Fifth, the market price, uniform at any instant of time, must be flexible over a period of time, constantly rising and falling in response to the changing conditions of supply and demand. There must be no friction to impede the movement of capital from industry to industry, from product to product, or from firm to firm; investment must be speedily withdrawn from unsuccessful undertakings and transferred to those that promise a profit. There must be no barrier to entrance into the market; access must be granted to all sellers and all buyers at home and abroad. Finally, there must be no obstacle to elimination from the market; bankruptcy must be permitted to destroy those who lack the strength to survive.

Perfect competition, thus defined, probably does not exist, never has existed, and never can exist. The term denotes the extreme of freedom from control over price, just as the term monopoly, in its strictest definition, is used to denote the opposite extreme of unlimited control over price. Actual competition always departs, to a greater or lesser degree, from the ideal of perfection. Perfect competition is thus a mere concept, a standard by which to measure the varying degrees of imperfection that characterize the actual markets in which goods are bought and sold.