Above is a quote from John Sloman, which I feel is a concise way of defining perfect competition. Rather than being a market structure which we can meet in real life, the model of perfect competition could be seen as a completion of the categories of market structure, an ‘anti-monopoly' situation.
To expand on this further, there is a very interesting point detailed by Sloman (p155), which is how the model of perfectly competitive firms does not experience “substantial” economies of scale. This notion also explains why perfect competition is more of a concept than an actually-realised form of market. Once companies within an industry expand enough to achieve economies of scale, companies then implicitly gain market power due to their increased size, allowing them to produce and sell on more cheaply than their competitors. But this goes against the principles of perfect competition, which I will go on to explain. Therefore, that is why there are no perfectly competitive industries – because in almost every type of industry there is the possibility for economies of scale. Sloman thinks that the closest market to being perfectly competitive is that for fresh vegetables, but for me, “approximately” (p155) is not good enough.
[...] Begg, Fischer & Dornbusch (p166) explain this: use the term marginal value product of labour (MVPL) for competitive firms who are price-takers in their output markets” The above diagram is my own version based on a similar version by Ben Knight, (p10). Because of decreasing returns to labour, extra person hours will be marginally less productive. So a firm should only hire extra labour when the market wage comes down. At the market price the firm should employ Eh* person hours. [...]
[...] Thus, if a seller receives above the market price for a product, then they are not a price-taker, which then goes against the rules of perfect competition. I can now analyse how strategy has a role in enhancing profit in a perfectly competitive firm. The following diagram is based on ideas I gained from figure 10.4 and 10.5 from Katz & Rosen ‘Economics' (pg305). But I have taken the ideas on those diagrams and re-drawn them myself, tweaking them slightly to serve my own purpose. [...]
[...] To keep the balance, there must be no ‘branding' of products, and thus no advertising, as either of these could influence buyers even as much as a brand name and logo could make a certain firm's output more desirable, raising its price. However, as I will discuss later, perfectly competitive firms probably would not even have surplus capital available to ‘brand' or advertise their products. Well-informed buyers and sellers this is important as if the buyers did not know the prices of all the sellers, then some sellers could charge high prices because there would be buyers who did not know they could get a better deal elsewhere. [...]
[...] And we know that the most efficient output is when MR=MC because when MR [...]
[...] Therefore I find that I agree with Katz and Rosen's definitions of the short run supply curve rather than Ben Knight's: Katz and Rosen: price-taking firm's short-run supply curve coincides with the vertical axis at prices less than the minimum of its short run average variable cost. The short-run supply curve coincides with the firm's marginal cost curve when it is above the firm's short-run average variable cost curve” (p305) Ben Knight: perfect competition the MC curve is the firm's supply curve” It seems that Knight has made an oversimplification in his definition. [...]
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