What Is Perfect Competition?
Perfect competition is a theoretical market structure. It’s useful for explaining how supply and demand affect prices and behavior in a market economy, but it rarely occurs in real-world markets.
There are many buyers and sellers in a perfectly competitive market, and prices are determined by supply and demand. Companies earn enough profit to stay in business, but no more. If they were to earn excess profits, other companies would enter the market and drive profits down.
KEY TAKEAWAYS
- Perfect competition is an ideal type of market structure where all producers and consumers have full and symmetric information and no transaction costs.
- There are a large number of producers and consumers competing with one another in this kind of environment.
- Perfect competition is theoretically the opposite of a monopolistic market.
- Since all real markets exist outside of the plane of the perfect competition model, each can be classified as imperfect.
- The opposite of perfect competition is imperfect competition, which exists when a market violates the abstract tenets of neoclassical pure or perfect competition.
How Perfect Competition Works
Perfect competition is the standard that all other market structures are compared to. It is the opposite of a monopoly, in which one company dominates the market and sets high prices.
In a perfect competition model, there are no monopolies. This kind of structure has a number of key characteristics, including:
- All firms sell an identical product (the product is a commodity or homogeneous).
- All firms are price takers (they cannot influence the market price of their products).
- Market share has no influence on prices.
- Buyers have complete or perfect information (in the past, present, and future) about the product being sold and the prices charged by each firm.
- Capital resources and labor are perfectly mobile.
- Firms can enter or exit the market without cost.
Imperfect competition is more realistic than pure competition because it happens when a market doesn’t follow the neoclassical ideal.
All real markets are classified as imperfect because they exist outside the plane of the perfect competition model. The theory of imperfect versus perfect competition comes from the Cambridge tradition of post-classical economic thought.
Characteristics of Perfect Competition
A perfectly-competitive market is defined by the following factors:
A Large and Homogeneous Market
In a perfectly competitive market, there are a large number of buyers and sellers and the products offered for sale are very similar. This means that buyers cannot distinguish between products based on physical attributes, such as size or color, or intangible values, such as branding.
There is a large number of buyers and sellers in this market, so there is a consistent demand and supply. This makes it easy for buyers to switch to products made by another company.
Perfect Information Availability
An industry’s ecosystem and competition can have a significant impact on a company. Things like component sourcing and supplier pricing can make or break the market for a company.
Having knowledge about a competitor’s patents and research initiatives can help a company develop strategies to be more competitive and make it so their products are not easily replaced.
Free and perfect information in a perfectly competitive market means that each firm can produce its goods or services at the same rate and with the same production techniques as any other firm in the market.
Absence of Controls
Governments can have a significant impact on markets by controlling aspects such as regulation and price. For example, the pharmaceutical industry is highly regulated, impact the way drugs can be developed, produced, and sold.
The rules set by the FDA require companies to invest a lot of money into things like employees and infrastructure. This makes it very expensive to bring a new drug to the market.
The technology industry has less oversight than the pharma industry, making it easier for entrepreneurs to start companies with little or no capital.
Firms in a perfectly competitive market do not face any restrictions on how much they can spend on labor and capital assets, and they are free to adjust their output in response to changes in market demand.
Cheap and Efficient Transportation
In perfect competition, transportation is cheap and efficient. This means that companies do not have to spend a lot of money to transport their goods, which reduces the price of the product and makes it easier to get the product to the customer quickly.
Theory vs. Reality of Perfect Competition
Differentiation in production, marketing, and selling is what sets real-world competition apart from the ideal. For example, a small organic products shop can advertise extensively about the grain fed to the cows that made the manure that fertilized the non-GMO soybeans, setting their product apart from competitors.
Although the first two criteria for the global tech and trade transformation are not realistic, the second two criteria are improved by the transformation. The model is still helpful because it explains many real-life behaviors, even though it does not accurately reflect reality.
Companies try to make their brand more valuable by advertising their unique qualities. By doing this, they hope to have more control over prices and a larger share of the market.
Barriers to Entry Prohibit Perfect Competition
There are several reasons why certain industries have difficulty attracting new businesses. High startup costs and complex government regulations are two examples that make it hard for companies to break into specific markets. Additionally, even though consumers are generally more informed than they used to be, there are still product categories where buyers are not aware of all the available options or how much they should cost.
There are many things preventing perfect competition from developing in the economy. The agricultural industry is the closest to perfect competition because there are many small producers who can’t change the selling price of their products.
Agricultural commodity buyers are usually quite knowledgeable and, even though farming has some entry barriers, it’s not hard to enter the market as a producer.
Advantages and Disadvantages of Perfect Competition
While the perfect competition model is a useful tool for understanding how a market economy works, it is not always accurate and has significant departures from the real-world economy. The value of the perfect competition model lies in how well it reflects actual conditions.
Since all consumers have access to the same products in perfect competition, they naturally gravitate towards the lowest prices, resulting in low profit margins for firms. For instance, it would be impossible for a company like Apple (AAPL) to exist in a perfectly competitive market because its phones are more expensive than those of its competitors.
As a result, firms have little incentive to innovate In perfect competition, there is no incentive for firms to innovate because they do not have a dominant market share.
Another disadvantage of having small firms is that there are no economies of scale. Having limited to zero profit margins means that companies will have less cash to invest in expanding their production capabilities. If companies expanded their production capabilities, it could potentially bring down costs for consumers and increase business profit margins. However, the presence of several small firms cannibalizing the market for the same product prevents this from happening and ensures that the average firm size remains small.
Pros and Cons of Perfect Competition
- Provides a convenient framework for modeling market activity.
- Demonstrates how producers are incentivized to provide lower prices.
- The perfect competition model is not an accurate reflection of real-world market conditions.
- The model is not specific to any geographical location or product.
- The model doesn’t include how producers can save money by producing on a large scale.
Online Real Estate Marketing in Competitive Markets
So if you’re in a competitive market, Let’s walk you through how to get in that search result for search engine optimization, but also just in search in general, to get those consistent stream of leads coming in to fuel your business. When you’re in a large market like that, you can really go deep in that market, and you can focus just in that market for the first year and get 30-40-50-60 leads a month if you really hit it hard. And that can fuel your entire business 2-4-5-6-10 deals a month if you do it right.
Keep in mind that only utilizing SEO will be difficult to have quick success and be consistent. Adding PPC will help with the momentum over the year.
You have twelve months to establish yourself in a large market. Remember that it takes time to build momentum and see results with SEO ranking. Be patient and keep at it; eventually leads will start coming in.
Choosing Your Top Keywords
There are two things you need to do to get traffic from Google. First, you need to choose the top keywords that are likely to give you 70% or more of the traffic. You can find a list of these keywords at carrot.com/seo-bible. Second, you need to do pay per click advertising. You can find a list of keywords for this at carrot.com/ppc-keywords.
PPC Marketing
In the first month or two, it’s important to focus on how you’re going to stand out from your competitors if you want to be successful in a competitive market. Oncarrot.com has a lot of resources, including guides, checklists, and blog posts, that can help you with this. Carrot customers can also get help from coaching calls and the three lead per day training.
The people that sent you a direct-mail piece, the people that have bandit signs up in their neighborhood, and the people that are in the same paid search results as you are all competing for the same thing. Even if you get there, and you don’t take care of the credibility piece, then you’re not going to win. So focus on that as a core strategy- what is your credibility score?
Building Credibility
You can listen to our CarrotCast episode on credibility score by going to CarrotCast.com or finding it on Google. This episode will walk you through everything you need to do to increase your credibility, whether you are an experienced investor or brand new. In a competitive market, it is also important to have a unique selling proposition so people will choose to work with you over someone else.
Build Citations
Next, make sure to do your citations. You can find more information on our blog at carrot.com/blog. If you’re a Carrot customer, we can do your citations for you in our marketplace. This sets the foundation for credibility for your website in that local market. Make sure to optimize for your company name plus the word “reviews.” This will ensure that you rank well for your company name when people are trying to research you. You don’t want to lose any deals because someone can’t find anything good about you online.
Social Signals
The next step are social signals. To get started, have five to fifteen people Google+ your homepage and Facebook like it over the first two months. If you’re planning to do your own SEO, aim for three to five backlinks per month. This might seem like a small amount, but it’s not a big deal. We teach how to do this in blog posts, in our coaching calls, and in our three lead per day training (if you’re a member). This training goes into a lot of detail.
If you are not a client, we do not sell that to the open public. However, if you watch this video after it is published, you can go to carrot.com/3lpd. If you do this several months from now, you can check it out.
PPC to Guide SEO
Use your pay per click data to guide your SEO strategy in competitive markets. One of the biggest mistakes people make is not integrating their PPC and SEO campaigns. You should launch your PPC campaigns and use the data to find the keywords that are converting into leads and deals. Use this data to guide your SEO strategy.
It’s important to follow up quickly in any market. If you’re in a competitive market, you need to answer your leads’ calls within minutes or answer them live. Many of our clients who switched to answering their calls live from pay per click and SEO started closing more deals. It’s a big deal.
Be sure to answer leads live, and if you’re a Realtorfuel customer, make sure text message notifications are turned on. That way you’ll get a notification via text message within seconds of a lead coming in. You’ll have a phone number you can tap to call the lead so you can follow up quickly. And lastly, have an abundance mindset. Remember that there’s enough for everyone when it comes to leads, deals, and success. Be open with your market and don’t try to keep secrets because the more you share, the more that will come back to you.
