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. 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 >>
  4. 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 >>
  5. Are perfect competition models in economics useful?

    Take a look at some of the arguments made by the proponents and critics of the theory of perfect competition in contemporary ... Read Answer >>
  6. Why are there no profits in a perfectly competitive market?

    See why economic profits are theoretically impossible in a perfectly competitive market and why some economists use perfect ... 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. Insights

    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. Investing

    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. Investing

    What are Barriers to Entry?

    A barrier to entry is any obstacle that restricts or impedes a company’s efforts to enter an industry.
  5. Investing

    Should You Invest In Agricultural Commodities And Stocks?

    With rising food prices and a booming agricultural industry, we look at whether the current market is a good investment opportunity.
  6. Insights

    Understanding Monopolistic Competition

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

    OPEN

    Agriculture
  8. Small Business

    Understanding Product Differentiation

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

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

    The existence of high start-up costs or other obstacles that ...
  5. Product Differentiation

    A marketing process that showcases the differences between products. ...
  6. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it ...
Hot Definitions
  1. Notional Value

    The total value of a leveraged position's assets. This term is commonly used in the options, futures and currency markets ...
  2. Interest Expense

    The cost incurred by an entity for borrowed funds. Interest expense is a non-operating expense shown on the income statement. ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  4. Pro-Rata

    Used to describe a proportionate allocation. A method of assigning an amount to a fraction, according to its share of the ...
  5. Private Placement

    The sale of securities to a relatively small number of select investors as a way of raising capital.
  6. AAA

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