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Economics

Study Notes

Evaluating Assumptions of Perfect Competition

Level:
A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Perfect competition describes a market structure whose assumptions are strong and therefore unlikely to exist in most real-world markets.

  1. Most firms have some amount of price-setting power – they are price makers not price takers!
  2. Dominance in real world markets of differentiated / branded products – a key part of non-price competition
  3. Highly complex products, there always information gaps facing consumers – we live in a world of complex products
  4. Impossible to avoid search costs even with the spread of low-cost digital/web technology platforms
  5. Patents, control of intellectual property, control of key inputs are all ignored by the perfectly competitive model
  6. Rare for entry and exit in an industry to be costless – there are very few industries that are perfectly contestable

Real World of Imperfect Competition

  1. Suppliers may exert control over the quantity of goods and services supplied and also exploit their monopoly power by having control over market prices
  2. On the demand-side, consumers may have monopsony (buying) power against their suppliers because they purchase a high percentage of total demand.
  3. There are always some barriers to the contestability of a market and far from being homogeneous; most markets are full of heterogeneous products due to product differentiation
  4. Most consumers have imperfect information and their preferences and choices are influenced by persuasive marketing
  5. There may be imperfect competition in related markets such as the market for key raw materials, labour and capital goods.

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