Perfect Competition

Perfect competition is a benchmark used in economics. Its conditions include many buyers and sellers, identical products, full information about prices and quality, and no barriers to entering or leaving the market.

Under these conditions, each firm is a price taker: it must accept the market price, because if it charged more, customers would buy from others. In the long run, firms earn only enough profit to stay in business, since any higher profits attract new competitors, pushing prices down.

Some agricultural markets come close. For example, many farmers growing the same grade of wheat sell at the market price, and no individual farmer can set a higher one.

In reality, perfect competition rarely exists, because products differ, information is imperfect and barriers to entry are common. But the model is useful for showing how competition benefits consumers through low prices and efficient production, and for comparing real markets, such as monopolies and oligopolies, against an ideal.