Perfectly competitive market
Characteristics of this market form – remember this is a description of a theoretically ideal situation that other market forms and reality can be compared with:
It is an impersonal market. Buying from and selling to any person.
Buyers and sellers are only interested in the trade.
The price of the product is determined by market forces only (supply and demand)
Individual buyers and sellers do not have the power to influence the market. Buyers
and sellers react to market signals, i.e. prices. (Competition = price competition only)
Complete knowledge of the market by both buyers and sellers.
Conditions for a perfect market
Products should be homogeneous (the same - standardised and identical) competing on price only.
There must be many sellers of the product. One seller should not be able to affect market prices by varying quantities for sale.
There must be a large number of buyers buying from any seller
Sellers must be free to sell to anyone in any quantity. Free competition is prerequisite. There should be no state interference and price control.
Neither buyers nor sellers should be effective in their attempts to manipulate prices by forming groups. They may attempt to influence the market but because of the quantity of players in the market they will be ineffective in doing so.
Perfect mobility of production factors is required (a perfect market should exist for production factors).
There should be no preferential treatment or discrimination among buyers and sellers. Products offered should be identical in form.
Transactions and information should take place in real time and as such all the participants must have perfect (complete) knowledge of market conditions. Buyers and sellers must be knowledgeable about the prices of suppliers, price quotations, conditions of demand, the economic climate. etc.
Zero returns to scale (ie input =output)
Nowhere in the world does one find perfectly competitive market conditions and South Africa, because of its socialist tendencies since 1910 and during the Apartheid years and then also after 1994, tends to have few major industries operating under these conditions - though some deregulation has taken place during the latter part of the eighties and also sporadically at other times. Examples of relatively perfect markets are foreign exchange markets, the markets for raw materials. and most futures and stock markets. Street markets are also used as examples of markets that meet or approximate the conditions for perfectly competitive markets. Open auctions also meet many requirements of perfectly competitive markets.