A:

First, let's review what economic factors must be present in an industry with perfect competition:

1. All firms sell an identical product.
2. All firms are price-takers.
3. All firms have a relatively small market share.
4. Buyers know the nature of the product being sold and the prices charged by each firm.
5. The industry is characterized by freedom of entry and exit.

These five requirements rarely exist together in any one industry. As a result, perfect competition is rarely (if ever) observed in the real world. For example, most products have some degree of differentiation. Even with a product as simple as bottled water, for example, producers vary in the methodology of purification, product size, brand identity, etc. Commodities such as raw agricultural products, although they can still differ in terms of quality, come closest to being identical, or having zero differentiation. When a product does come to have zero differentiation, its industry is usually consolidated into a small number of large firms, or an oligopoly.

Many industries also have significant barriers to entry, such as high startup costs (as seen in the auto manufacturing industry) or strict government regulations (as seen in the utilities industry), which limit the ability of firms to enter and exit such industries. And although consumer awareness has increased with the information age, there are still few industries where the buyer remains aware of all available products and prices.

As you can see, there are significant obstacles preventing perfect competition from appearing in today's economy. The agricultural industry probably comes closest to exhibiting perfect competition because it is characterized by many small producers with virtually no ability to alter the selling price of their products. The commercial buyers of agricultural commodities are generally very well informed and, although agricultural production involves some barriers to entry, it is not particularly difficult to enter the marketplace as a producer.

For more insight, check out Economics Basics Tutorial and Setting Vs. Getting: What Is a Price-Taker?

RELATED FAQS
  1. What parameters are required for a market to exhibit perfect competition?

    Learn what parameters are required for a market to exhibit perfect competition and how perfect competition is more of a theory ... Read Answer >>
  2. What is the difference between perfect and imperfect competition?

    Learn the differences between perfect competition and imperfect competition and what types of markets are considered imperfectly ... Read Answer >>
  3. What factors influence competition in microeconomics?

    Find out what influences competition in microeconomics and how perfect competition, monopoly and oligopoly vary in their ... Read Answer >>
  4. Do all economists believe in perfect competition?

    Find out why neoclassical economists use unrealistic perfect competition models, and learn why other economists criticize ... Read Answer >>
  5. Why is product differentiation important in today's financial climate?

    Learn the importance of product differentiation and how businesses today are utilizing it to set themselves apart from the ... Read Answer >>
  6. What is the difference between a monopolistic market and perfect competition?

    Learn about monopolistic and perfectly competitive markets, what they are, and the main differences between perfect competition ... Read Answer >>
Related Articles
  1. Investing

    What's a Price-Taker?

    Price-taker is an economic term describing a market participant who has no effect on overall market activity.
  2. Markets

    Perfect Competition

    Perfect competition is an economic idea that does not exist in the real world but can be used as a standard to measure the efficiency and effectiveness of real world markets.
  3. Markets

    Understanding Imperfect Competition

    Imperfect competition appears in several different forms. Markets are evaluated by how they compare to, and try to approach, perfect competition.
  4. Markets

    Macroeconomics: Economic Systems

    By Stephen Simpson Within the study of macroeconomics, there are certain basic goals for economic systems. Generally speaking, desirable goals include economic growth, full employment, economic ...
  5. Markets

    Understanding Monopolistic Competition

    Monopolistic competition exists in industries that have many firms offering similar products or services: for example, restaurants, supermarkets and clothing stores.
  6. Markets

    What are Barriers to Entry?

    A barrier to entry is any obstacle that restricts or impedes a company’s efforts to enter an industry.
  7. Entrepreneurship & Small Business

    Understanding Product Differentiation

    Product differentiation is a marketing tool companies use to distinguish their products or services from the competition’s.
  8. Financial Advisor

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  9. Markets

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.
  10. Insights

    Capital Intensive Companies: What Are The Pros & Cons for Investors?

    Learn about the pros and cons of investing in capital-intensive industries. Find out how barriers to entry and mature industries impact investment outlook.
RELATED TERMS
  1. Perfect Competition

    A market structure in which the following five criteria are met: ...
  2. Price-Taker

    1. An investor whose buying or selling transactions are assumed ...
  3. Monopolistic Competition

    Characterizes an industry in which many firms market products ...
  4. Imperfect Competition

    A type of market that does not operate under the rigid rules ...
  5. Barriers To Entry

    The existence of high start-up costs or other obstacles that ...
  6. Competitive Pricing

    Setting the price of a product or service based on what the competition ...
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  3. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  4. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  5. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  6. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
Trading Center