Perfectly Competitive

The state of a market in which there are enough sellers that they all must be identical, since any added value to their product, and subsequent increased price, will cause:

The price of the product to rise, putting the vendor at a disadvantage, and, ultimately, out of business
The cost of producing the product to increase above the revenue of the product, again, causing the vendor to close its doors.

An implication of this type of market is that the price of the product and the cost of the product are the same.

I have a gut feeling that we're trying to equate FreeMarket with PerfectlyCompetitive, or, alternatively, we're trying to make PerfectlyCompetitive some sort of great situation which must be the case in all cases.

I don't know if a PerfectlyCompetitive market is something I'd want to be in, since I could no longer demand a premium if I were somehow better than my competitors, and I would be completely bound to whatever the market demands of me.

What are the implications of a PerfectlyCompetitive labor market? -- EvanCofsky

If the market for your labor is PerfectlyCompetitive, and you are better at your job than your competitors, then you can demand a premium wage -- but the amount of the premium is exactly equal to the extra value (i.e., something that can be passed along to customers) that your high-quality labor gives to your employer.

If the market for your labor is not PerfectlyCompetitive, then the market's inefficiency might work for or against you. If it works for you, then employers are so desperate for your labor that the one who hires you is the one who makes the most optimistic estimate of what your labor is worth -- and since this is probably an overestimate (the ones who made realistic estimates were outbid by the optimists), the employer will actually lose money, in the long run, by hiring you, and you collect EconomicRent. (Hmm ... is this the situation in the software industry today?) If it works against you, then employers in your region, given the number of people competing for each available job, can offer salaries below the PerfectlyCompetitive level and still fill all available jobs; the employers collect EconomicRent. -- SethGordon

Also if you're not in a PerfectlyCompetitive market, how do you know, and how do you determine what the PerfectlyCompetitive price would be? -- EvanCofsky

Well, one way is to look at the numbers of buyers and sellers; the more you have of both, the closer the market is to perfect competition. (For example, compare the airfare to cities served by only one airline with the fare to cities served by two.) A real economist might know more subtle techniques. I recall reading that antitrust experts have some techniques for analyzing the prices that competitors bid on public-works projects; certain bidding patterns indicate that the competitors might be colluding to fix the price. -- SethGordon

Also, if you are in a PerfectlyCompetitive situation, the cost of improving your skills will be greater than the revenue you would bring in by charging more, since you would soon find that your clients have gone elsewhere. Also, in a PerfectlyEfficient? market, I would be able to charge no more than my costs, which would in effect lower the price I can sell for. If I increased my costs in a PerfectlyCompetitive market which was until that point also PerfectlyEfficient?, and then I increased my price to cover my costs, since the market is PerfectlyCompetitive, my higher price looks unattractive to consumers who can obtain a comprable good elsewhere for a lower price. If I don't charge enough to meet my costs, then I loose money, and go under. -- EvanCofsky

Yeah, capitalism is brutal, ain't it?

I never said it wasn't. However, as you point out later on, this situation will probably never arise, and if it does, it will not be permanent. -- EvanCofsky

Marx predicted that capitalism would inevitably lead to monopolies, because the competition between businesses would wring out all competitors. And then the monopolies, trying to extract maximum profits from their workers, would pay them just barely enough for the workers to live on. And then the workers would get fed up with their treatment and stage a revolution, putting the monopolized and highly efficient businesses in the hands of a state that would benefit the workers. And this revolution would obviously happen first in the most advanced capitalist countries, i.e., Germany, England, and the United States. Oops.

A later economist -- I think it was Robert Solow, whoever it was, he won the Nobel for it -- said the reason this doesn't happen is because of technological innovation. If a company uses a new technology that makes its operations more efficient, it can have a higher profit margin than its competitors, or capture market share from them by lowering its prices. -- SethGordon

Exactly. Because of technological innovations, which is caused by people finding new ways of doing things, the market is never in one state constantly. We all know what happened to the "proof" of Marx's theories. The one thing that most people who study economics seems to miss is that technology keeps everything unstable, as it should be. -- EvanCofsky

Even in the absense of technological change at the producer's side, there is also the problem of imperfect information at the consumer side. Companies can also use misinformation to advance their market share. The illusion of improvement is just as effective (if not more so) than actual improvement. Unless human psychology changes such that an ArgumentFromAuthority is no longer accepted, those in authority have no obligation to innovate, and can survive despite the innovation of others.

See also VaporWare.

The initial definition seems to be more geared towards the more common term "Commodity" than to define "Perfectly Competitive." A commodity assumes all variation has been removed from an item. It is unclear if this can ever be completely done, and would imply that perfect competition would inhibit innovation.

CategoryEconomics