Perfect Competition: Advantages and Disadvantages

Perfect competition happens when there are many producers in the market, with very few entry barriers, and those producers produce identical products. Consumers have perfect information (with regards to the past, present, and future) about the product being sold and the prices charged by each corporation. Perfect competition is theoretically the opposite of a monopoly market.

Following are the Advantages and Disadvantages of Perfect Competition.

Advantages (Pros / Positives / Benefits) of Perfect Competition

1. Very Low Barriers to Entry & Exit

Markets experiencing perfect competition have very low barriers to entry. The advantage is for both customers and the total industry. There will be new entrants in the market which brings healthy competition to the industry. Also, consumers will not be a risk when a few companies get together and increase their prices.

2. Chance Of Customer Exploitation Is Low

Any seller in the perfect competition market does not have monopoly pricing power. They can not influence the output and price as individuals or groups since barriers to entry are low. This is a positive factor for the consumers since their chance to be exploited is low.

3. Consumer Information Is High

Usually, there is a high level of information available to the customers in perfect competition firms. This provides a greater advantage for the consumers to make informative decisions. This will result “Customer Is King” level in the market.

4. Active Business Environment

Perfect competition results in an active business environment. There is a good level of competition, individuals or groups can not dominate in the market, and many firms have the market share distributed. These will result in many benefits for the industry.

5. Availability of High-Quality Products with Low Price

The level of competition is high in the perfect competition market. Firms have to lower their profit margin and provide consumers low price competitive products. The market share will be loosened otherwise. Also, firms have less chance to compromise the quality since consumers can move from one brand to another easily.

6. Decrease Room For Monopoly With A Large Number of Producer Availability

Since barriers to entry are low in perfect competition, there will be many producers who will join the market continuously. This is a very positive factor for the consumers and the industry as a whole.

7. Standardize Products Irrespective of Producers

Consumers will get standardized products in the perfect competition market irrespective of the seller. The consumer does not have to compare and think much since all products will serve the same purpose. Producers will also have to spend fewer advertisement expenses since all products are homogeneous.

8. Optimum Utilization Of Resources

Firms earn a fewer profit margin because producers have to compete with a lower price. Therefore producers try to increase efficiency and minimize wastage by utilizing resources properly which results to lower the cost of production. This will help the producers to increase their profit margin.

Disadvantages (Cons / Negatives / Drawbacks / Risks) of Perfect Competition

1. Identical (Non-Differentiated) Products and Services

Consumers will get the same kind of identical product in the perfect competition market. This is a disadvantage for the consumers since they are limited with choices and different experiences.

2. Heavy Competition Results More Producers Exit

Heavy competition is another disadvantage for producers due to low barriers to entry and exit. Producers may not continuously be in the market due to this. This will result in a negative impact on an industry whole.

3. Risk Of Predatory Pricing

If a company has a large investment capability, it can choose the option to set the prices very low to attempt to drive out competitors and create a monopoly. Competitors will not be able to sustain if a firm set the prices low for a consecutive duration. They can simply use the predatory pricing method.

4. Less Production Efficiency of Individual Firms

A perfect competition market allows many competitors in the market. This results in difficulty for the companies to achieve economies of scale. A company can not reach the optimum production efficiency capability due to the unavailability of economies of scale.

5. Less Research and Development

Producers have less potential to earn profit. This may result in fewer reserves for the producers to start more research to uplift the product portfolio.

6. Excess Resource Waste

Many firms compete in the market to produce similar products, using the same resources. But no firm can reach economies of scale. Any firm can not hit the optimum production optimization level. This will increase the resource waste in the industry as a whole.

7. Misleading Advertising

Firms may try to invest more and more in advertising with the non-differentiated products available. Some advertisements may be false and misleading. Firms may brag about the product quality more than what it is, which is unfavorable from a consumer’s point of view.

Read More:

Market Structures

Perfect Competition

Monopolistic Competition

Oligopoly Market

Monopoly Market

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