What is pure competition?

Also known as perfect competition, pure competition is a situation where the market for a product is filled by so many consumers and producers that no entity has the ability to influence the price of the product enough to cause a fluctuation. In this type of market environment, sellers are considered price takers, indicating that they are not in a position to price their products outside a certain range, since many other producers operate in the market. At the same time, consumers have little influence on the prices offered by producers, since there is no single consumer group that dominates demand.

In reality, pure competition is more theory than fact. While there are rare situations where a market operates with pure competition for a short period of time, the situation usually changes as various factors alter the impasse created by a multitude of sellers and buyers. This is usually due to the rather stringent set of factors that must be present for competition to be considered perfect or pure.

There are several essential characteristics that define pure competition. One has to do with balancing buyers and sellers. When there are an infinite number of buyers who are willing to buy the products offered for sale by an infinite number of producers at a given price, the opportunity for anyone to act to change the market price is extremely limited. The price remains more or less the same, and the same number of buyers buy the products from the same range of producers.

With pure competition, sellers can easily enter or exit the market without creating undue influence on price. Consumers continue to shop at the same rate, even if two companies leave the market and only a new one enters. Collective producers who are still in the market simply continue to produce enough products to satisfy consumer demand, with no change in the market price.

Firms participating in a market of pure competition generally structure production so that they incur marginal costs at a level at which they can earn the most profit. When the product line is homogeneous, it means that the products produced are essentially the same as the product line produced by other vendors in the market. Assuming that costs are in line with marginal revenue, the business can generate a constant profit as long as the condition of pure competition is present in the market.