Perfect Markets: Do They Exist - Essay Example

Perfect Markets: Do they exist of the of the Concerned July 30, 2009 Perfect Markets: Do they exist A market system may be considered to be an integral aspect of an economy in which the decisions pertaining to the production of specific products and services, the selection of methods for the production of the given products and services and the choice of methods for the distribution of these products and services are primarily dependent on the interactions taking place between the buyers and the sellers, who are associated with these products and services and the factors influencing their production (Pass, Lowes & Davies, 1993). Depending on the selection of structural permutations and combinations there exist many types of market situations like oligopoly, oligopsony, bilateral oligopoly, duopoly, duopsony, monopoly, monopsony, bilateral monopoly and perfect competition or perfect market (Pass, Lowes & Davis, 1993). Fundamentally speaking, the three salient market situations are monopoly, oligopoly and perfect competition. A monopoly is a market situation characterized by a single seller, similar products and many buyers. In a monopoly, the seller commands a major influence over the price of the product. An oligopoly is a market system that has few firms, homogeneous products and multiple buyers. In an oligopolistic market, the products usually have high investment costs that make the entry of new players in the market utterly difficult if not impossible. Contrary to a monopoly or an oligopoly, perfect market is a system defined by very different set of parameters. According to Lim Chong Yah, "Perfect competition is a market situation where there is a large number of buyers and sellers, a homogeneous product, free entry of products into the industry, perfect knowledge amongst buyers and sellers of existing market conditions and free mobility of factors of production among alternative uses (1981)." The question that often attracts the attention of the students of economics is that is perfect market a pragmatic and observable reality. A thorough catechism on the given line of query necessarily calls for a basic understanding as to what a perfect market is. The essential features of a perfect market are: 1. Perfect Rationality - All the participants including the buyers and the sellers tend to be perfectly rational and economic men. 2. Large Number but Small Size of Buyers and Sellers - In a perfect market, the number of buyers and sellers is very large. However, the potential of the respective buyers and sellers is so small that none of them has a discernable influence over the demand, supply and price of the commodity being sold. 3. Homogeneous Products - A perfect market is usually associated with homogeneous products so that the buyers have no reason as to prefer the product being sold by any particular seller. 4. Perfect Knowledge - In a perfect market, all the buyers and sellers have a perfect knowledge of the price of the product prevailing in the market at a given time. Therefore, in a perfect market there exists no uncertainty as to the price of the commodity being sold. 5. Free Entry and Exit of Firms - In a perfect market, there exist no social, financial or legal restrictions hampering the entry of a new firm in the market or the exit of any old firm from the market. 6. Free from Checks - A perfect market is free from checks in the sense that the buyers and the sellers are free from all types of restrictions governing the buying and selling of a commodity in the market. Such checks may include government restrictions and agreements between the buyers and the sellers regarding the quantity, price or the production of a commodity. 7. Perfect Mobility - One basic assumption associated with a perfect market is that it has a free mobility of the factors of production and the goods and services. Any particular firm monopolizes no factor of production and all the firms are free to sell their goods and services in the markets of their choice. In addition, the buyers are free to procure products and services from any firm they like. 8. Lack of Transport Costs - In a perfect market, the price, production and supply of a commodity is not influenced by transportation costs. 9. Lack of Selling Costs - As the products and services sold in a perfect market are homogeneous, the sellers are not required to invest in advertising and publicity and there exist no selling costs. 10. Same Price - In a perfectly competitive market, all the firms charge the same price for the commodity or service being sold. In such a scenario, the average revenue and the marginal revenues of the product tend to be equal. Do perfect markets really exist In a realistic scenario, it is next to impossible to consider or assume that any single market system pervades an economy, even in the context of a specific product or commodity. An actual market is often defined by a series of dimensions in the context of product attributes, spatial arrangements and physical peculiarities. With regard to product attributes, a market is always replete with a range of products and services that are perceived as substitutes by consumers. Spatial ramifications may lead to the classification of a market as being local or global, subject to considerations such as transportation costs, consumer preferences and political moorings. Physically speaking it is not necessary that the transactions between the buyers and sellers will take place in a tangible market place. In today's digitized economies, the transactions between buyers and sellers may take place in a virtual environment, which may often involve a series of intermediaries, thereby leading to transaction costs. Further, the information technology has altered the production scenario in the sense that it allows for the addition of intangible entities like information and data to the production process, which makes the pricing mechanism of a product more ambiguous and fluid. Hence, to access the viability of a perfect market in a real life scenario, it will be pragmatic to analyze the various attributes of perfect market individually and with a commonsensical approach. One essential condition for the sustenance of a perfect market is that it should have a large number of buyers and sellers, none of which should be in a position to exert any influence on the price of a commodity. However, in the real life, things stand to be utterly different. There does exist a plethora of firms who do have the power to influence the volume of production and price of goods and services. The emerging retail scenario in the developing countries like China and India is a perfect example of such a situation. The traditional retail business in Asia was more or less affiliated to the spirit of perfect competition. The retail sector in this part of the world consisted of a large number of small buyers and sellers. However, with the emergence of the global players like Wal-Mart, things have started to change. These big firms playing on large volumes do have the potential to influence the price and production of the commodities sold by them. In fact, the traditional mom and pop stores are no match for them. These global players do manage to purchase large quantities of commodities at low cost, thereby enabling them to have a significant control over the price of the commodities sold by them. Perfect markets work on the assumption that both the buyers and the sellers are perfectly rational beings who are solely motivated by the objective of maximizing profits. Yet, how often do we come across institutions and organizations, which contradict this assumption. The global markets are replete with non-profit brands like Green Peace, Salvation Army, Red Cross, Amnesty International, etc which do not operate for the sake of maximizing profits, but for the betterment of society (Ziebarth, 2008). Hence, such organizations are in violation of the assumptions defining perfect markets. Moreover, community welfare is not the sole prerogative of non-profit organizations (Ziebarth, 2008). Impelled by statutory requirements and motivated by the emerging trends, many professionally managed corporate firms like British Petroleum are making huge investments in costly green technologies. Such a business approach definitely contradicts the perfect market maxim of profit maximization. There is no denying the fact that profit maximization is not the sole motive governing the contemporary world economy. The local and global markets are largely also influenced by welfare motives, emerging trends and problems and business ethics. Perfect markets are governed by the assumption that both the buyers and the sellers have a perfect knowledge pertaining to the price of a commodity prevailing in the market. However, once again, IT revolution and digitization of economies have changed the very notion of market. The local economies' integration with the international markets has made the task of price detection and allocation a speciality in itself. The technologically developed nations who afford to invest in information technology do have a faster and easier access to market realities. On the contrary, the third world being deficient in digital infrastructure does not enjoy an unrestricted access to global trends. This technological gap and non-uniform flow of information are two major factors that shatter all the possibilities of existence of a perfect competition in the world markets. The requirement of rationality supporting the idea of perfect markets is also open to debate. Actual economies are too large entities to be grasped by simplistic theories. What may seem rational at a particular time may seem absurd in a different scenario. Considering the current credit crunch, the financial institutions in the US a few years ago found it rational to extend credit to customers with dubious credit ratings. However, in retrospect, the ongoing sub-prime crisis makes the past policies appear senseless and illogical. There is no denying the fact that some markets do come close to the true meaning of a perfect market. For example, the experts often cite the markets of agricultural commodities as being perfect. Going by the large number of suppliers and a range of products that are substitutable, this may sound true. However, the given example ought to be interpreted in the context of the markets one is talking about. Markets of agricultural commodities do tend to be perfect in protectionism oriented third world economies. However, the markets in developed economies relying on corporate farming, burgeoning food processing industry, free flow of information and large-scale mechanization, in no way qualify to be labelled as perfect. In fact, such disparities in the way the markets of agricultural commodities operate in the North and the South have given way to the looming food crises. The assumption of perfect competition as the basis of Price Theory is utterly senseless and absurd. This assumption in the Price Theory renders all the involved agents as being pathetically passive. Hence, it totally obfuscates the possibility of maximizing profits by price undercutting, innovation, advertising and marketing, which never happens in the real world. The denial of the assumption of perfect market in no way dilutes the existence or validity of competition. However, in the 21st century, the concept of competition has assumed new interpretations, courtesy the existence of behemoth MNCs, who have the wherewithal to enter and influence the market of any commodity or service. The reality is that perfect markets simply do not exist. Perfect market is merely a theoretical proposition that startlingly denies the factors operating in the real world economies. At the most, the notion of perfect markets can be used as a tentative yardstick to evaluate the more pragmatic and real market structures. The contemporary market realties are very different from those rampant in the 19th century markets. Many economists fascinated by the simplicity or rather facility of the concept of perfect markets, devised intricate economic theories, which project nothing like what one sees in the modern markets. Resorting to such theories for interpreting the existing realities will only result in debilitating outcomes as the world is facing today. The objective of any sane economic theory should not be to trim the existing realities to make them fit into theoretical moulds. Instead, the primary responsibility of a valid theory should be to accept, understand and adapt to the emerging scenarios. Works Cited Chang Yah, Lim (1991), Commentary on Economics and Current Affairs, New York, Federal Publications. Pass, C., Lowes, B & Davies, L (1993), Collins Dictionary of Economics, Glasgow, HarperCollins Publishers. Ziebarth, Bruce (2008), Perfect Competition and Market Failure. Associated Content. 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