Talk:Perfect competition/Archive 1

Archive 1

Request

Hello; does anyone know of a good text book on the subject of perfect competition? PJ 18:24, 11 February 2006 (UTC)

Well, to begin with, I suggest anybody to be very carefull with what is usually said, both the main books talking about and people criticizing it are saying lots of crap ! If you can, I suggest any kind of books from Bernard Guerrien. But most are in French... Maybe you can find some papers in English on the internet... —Preceding unsigned comment added by 82.240.32.93 (talk) 22:51, 27 September 2007 (UTC)

All three references

are to criticisms and none to the subject that the article is actually about. Moreover, two of the references are to the same guy. That most economists haven't heard of, outside perhaps the post-Autistic folks. There's also editorializing and NPOV in the references. The whole article reads like someone with an axe to grind, but with very little knowledge, went through and inserted snips of misguided 'criticisms'.radek (talk) 00:14, 16 December 2007 (UTC)

This entire paragraph...

constitutes Original Research:

"To be exhaustive, note that some economists[1] do not agree with this presentation of the model of perfect competition. Many reasons are advanced, but one of the main is that it focuses on unnecessary conditions (atomicity, perfect information...) while it does not allow an answer to the question : "If agents are price-takers, who sets the prices ?" Indeed, in this model, as firms and consumers can not set the prices, it can't be—as it is often said (e.g. below)—that it is the firms who fix them. So, actually, there is a need for a benevolent agent who proposes prices to firms and consumers and fixes the ones at which exchange will occur. They also think that the argument that a global entity called "the market" could fix the prices, when its constituents (producers and consumers) can not is greatly disturbing[2]. Above other criticisms, there is also the lack of emphasis on the fact that no uncertainty about future prices or incomes, no transport cost, and no indivisibility can satisfactory integrated in this model because most of its positive results (such as the existence of a general equilibrium) can not be achieved anymore."

and, more so, is simply incorrect. First uncertainty can be incorporated into a perfectly competitive model. It can certainly be incorporated even into a general equilibrium model (what exactly is this paragraph criticizing, PC or GE?) - see the Theory of Incomplete Markets. More so, even with Incomplete Markets, general equilibrium still exists (though it is no longer PO). Likewise you can have transportation costs and indivisibility in perfectly competitive models. The key is that in all instances firms act as price takers, or ACT IF as if they're price takers. Which means that the question of "who sets the prices" is somewhat irrelevant. It is relevant in general equilibrium models. But you can have a Bertrand competition model where firms (as few as 2 of them) producing a homogeneous good SET prices that would prevail in a perfectly competitive market.

Unless this re-written and properly referenced I'm going to remove/rewrite this paragraph.radek (talk) —Preceding comment was added at 00:07, 16 December 2007 (UTC)

Agreed. DoneLarklight (talk) 18:21, 26 January 2008 (UTC)

Although now the following paragraph needs attention, I can't understand it. Larklight (talk) 18:26, 26 January 2008 (UTC)

these "five" conditions have nothing to do with perfect competition

Definition is inconsistentas first condition stipulates that firms are "price taker" and third condition that "All firms and consumers know the prices set by all firms" - so that firms "set prices". Only one question : if everybody is price taker, WHO set prices ? Mister Market ? That's nonsense. The main condition is that there is an "auctioneer" in the Walras mood, who set prices - agents believing' they can buy and sell all they want at this prices. Nothing to do with the "five conditions".

Answering your question about who set the price, I think it is the interaction of demand and supply who is responsible for this issue. Sheitan 14:56, 13 January 2007 (UTC)

Market forces set the market price, because all products are homogenous, market price is set for all firms where D=S, don't forget this is all hypothetical, as is the entire model, for example, we have to assume perfect knowledge of the market, which is never going to happen.Lukeitfc 19:36, 25 February 2007 (UTC)

It's really funny, here, in a tiny little space, a little piece of TRUTH completely immerged into an ocean of unbearable scientist bull***** ! "if everybody is price taker , who set the price ?" asked our friend... Naturally, where there are good questions, often follow good answers ! Hence, he answered the only correct answer : there is the walrasian "auctioneer", in other word, there is some kind of 'planificator' who play the role of proposing prices (who could say it is a model describing how decentralized markets work ??)

Now look at the answers given by out friends Sheitan and Lukeitfc in their try to fight against this (obviously disturbing) idea ! Prices are set by "Market forces" "interaction of demand and supply" ! How can people decide to answer back, how can they think their answers could be helpful in this debate with such incoherent and poor arguments ? I remind you that the first assumption you learn is that the people in this model CANNOT fix the prices (yes, it is why they are called pricetakers, amazing isn't it ?) Can the market be something else than the people constituting it ? Are the supply and demand something else than the aggregation of people offering and demanding quantities of goods for given prices ? Well, according to them, yes, because a mysterious forces can do things people can't do ! It can set prices ! Truly miraculous, isn't it ! How amazing, we thought we were doing economics, it finally appears we are doing magic ! If the only answer they can produce is to refer to some kind of supernatural phenomenon, why not market are ruled by God ?

So, to me, the important question, when you have understood all that, is why Sheitan and Lukitfc are able to think they can talk about a model they have never understood ? (this question helping us to understand why, in general, this model is still taught everywhere without being said that it is of no relevance to describe market economy...) Well, I often observed that people who were forced to accept ideas without understanding them are always the first to defend them afterwards... Actually, we could even thinkit is almost a general law for the human beings : it is like, the more they suffered to accept anykind of ideology, the more they spread it with the most extremist faith !

Calm down, people, and sign your posts, please. What I am sure Sheitan and Lukeitfc meant was that firms are forced by their desire for maximizing profit to adapt to market conditions in a certain way, kind of like how certain conditions in a jungle would force people stranded in the jungle to make certain decisions to survive for as long as possible. This is a set of conditions influencing human behaviour, which is hardly a ridiculous idea at all. I would say the auctioneer idea is more ridiculous. Besides, the problem was never the validity of the model, but rather the validity of the definition, and the definition is perfectly valid. -Capefeather (talk) 01:01, 27 January 2008 (UTC)

Assumptions

This section is horrendously written and I'm not sure how to go about fixing it completely. -Capefeather (talk) 01:08, 27 January 2008 (UTC)

Comparison with Free Software?

I can see a lot of similarities between perfect competition and free software. What are people's thoughts on this? — Yama 15:45, 21 April 2007 (UTC)

Can you be more specific because I can't see the similarities. Karina.l.k 09:42, 26 April 2007 (UTC)

Very low barriers to entry i.e. Anyone with a computer can join the market. All (or nearly all) information about who is doing what is availible to any individual who wishes to know. The market can be entered or left for free, and in freedom. All code is freely availible to be modified, compiled or used as part of another project. This represents market information in perfect competion. In fact the only real difference is that none of the participants are such for monetary gain. - 30 June 2008 —Preceding unsigned comment added by 86.132.248.29 (talk) 23:22, 29 June 2008 (UTC)

Stock Market perfectly competitive?

On the examples section of the article. I have misgivings about representing the stock market as very close to being perfectly competitive for another reason besides the reason already mentioned that many agents on the stock market are very big and influential. The reason is that exchangers on the stock market are not price takers; they propose a price for the sale or purchase that interests them, and then wait to see whether someone accepts. The salesclerk on the floor may have instructions that if after a few minutes the deal has not been struck he should propose a different price etc., but it is always price making. Which is precisely the reason why prices change on the stock exchange. By the way, the continuous change of price of a stock or option makes it very difficult to conceive that price as ever being an equilibrium price; transactions go on at different prices (even if the differences may be very small) at the same moment, so the law of one price does not hold. Price taking for day-by-day transactions probably exists only on the buyers' side when the product price is fixed by the sellers (like in most shops). However I would like opinions on the applicability of perfect competition to EBay and similar things. Mimuli (talk) 17:28, 9 July 2008 (UTC)

Textbook Material

If it helps this article, perhaps some textbook entries would help with citation. Also, further refine the opening paragraphs. What this article needs is a trimming down to only necessary (but generally accepted) information. mikecucuk 17:31, 10 July 2008 (UTC)

I do not understand the first part of the above comment. My version was definitely textbook-based, check the textbooks used in most PhD courses, i.e. Mas-Colell and others, or Kreps, both of which are cited. In both, price taking is taken as the centrally defining characteristic of perfect competition. I add some comments on the change introduced by Mikecucuk. Price taking cannot be made to disappear from the definition. Defining perfect competition as absence of market power will not do, unless one also specifies what absence of market power means; so it must be clarified that it means inability to affect the equilibrium price (not the price whatever it happens to be, but the equilibrium price - an important distinction, not always made clear but clear in the rigorous treatments, as I point out). Also, Mikecucuk's list of conditions is not precise. Perfect competition is perfect, so it is incompatible with products 'nearly' identical, or with 'low' barriers to entry: these may mean high level of competition, but not perfect competition. Perfection is something else. So I defend my opening paragraphs as more accurate and reflecting better the complexities of the notion, about which there isn't complete agreement among economists, vide the different lists of conditions supposedly guaranteeing price taking with different authors. On the suggestion to trim down, let me invite caution. For example, the distinction between short-period and long-period notions of perfect competition is fundamental to understanding the confusing definitions of the concept. Let me give one example. The intermediate textbook by Katz and Rosen lists, among the conditions for a market to be perfectly competitive, that there must be no barrier at all to entry, neither legal nor technological. One page later, when discussing the perfectly competitive short-period equilibrium, the book says that in the short period there cannot be entry because there is not enough time to get the fixed factors. This means, according to their own definition, that the equilibrium cannot be called perfectly competitive, because there is a technological barrier to entry! How is one to deal with this type of patent contradiction? The best way is to have a longer article, that explains that the definitions are not always coherent and points out why. In this way the reader comes out with a more solid grasp of what she/he is dealing with when meeting the notion. But I wait for further comments before intervening. Mimuli (talk) 19:25, 14 July 2008 (UTC)

No intervention so far disputing what I have written above, so I will wait a few more days and then I will replace the present beginning of the article (which also needs corrections of the English, the "They" refers to nothing, and "A perfect competition" is bad English) with the following:

Perfect competition is the term used in neoclassical economics to designate the market form in which all agents, both buyers and sellers, act as price takers in equilibrium i.e. accept that they cannot influence the equilibrium price. This is also expressed by saying that no agent in that market has market power. A long list of conditions believed to guarantee such a behaviour was provided by Jevons, Edgeworth, Knight, and others (Stigler 1957); nowadays a perusal of textbooks results in a list more or less like the following: - homogeneity of the good on sale (indifference of buyers among the goods offered by the several sellers), - anonymity (indifference as to whom one is exchanging with), - atomistic market (numerosity of agents and smallness of their demands and supplies relative to the size of the market), - readiness of agents to take advantage of every opportunity to improve their condition by switching to trading with different agents and/or proposing a different price (costlessness of such switches is also often added), - perfect information (about the prices charged by other sellers), - absence of collusion, - linear prices (jargon for expense linear in the quantity bought, i.e. no discount nor extra charge for large purchases), - no transaction costs for resale of the good (this is to make arbitrage easy and hence price discrimination impossible), - free entry and free access to state-of-the-arts technology, if the good is a product. Some subset of these conditions is presented in most textbooks as defining perfect competition, but it seems more rigorous (e.g. Mas-Colell et al. 1995 p. 315) to adopt the definition centered on equilibrium price taking, which focuses on the single analytical assumption distinguishing the equations determining perfectly competitive equilibria from those of imperfectly competitive ones; the list of conditions mentioned above is best seen as an attempt to indicate the market characteristics that should guarantee price-taking behaviour, but a rigorous proof that indeed they suffice is still lacking (Kreps 1990, p. 265). Also, the components of the list derive from heterogeneous analytical needs, and mix short-period and long-period aspects of competition. A historical approach is useful. Mimuli (talk) 10:26, 22 July 2008 (UTC)

A few comments.

1. I don't think it's up to us to decide which definition/description of perfect competition is the best or the most rigorous. If there are different definitions, then I'd say what we should do (and you largely do above) is to describe the essence in which those definitions agree (and such agreement will probably be informal), and perhaps later describe the details of differences.
2. I don't think the opening paragraph should reflect all the complexities of any idea. That's for the rest of the article text.
3. If the notion of price-taking is going to be treated rigorously, then that can't be done in the lead without making the lead baffling. Instead, there could be a section on price-taking. I think I'm going to wind up disagreeing with the gist of your description of price-taking (price taking being an equilibrium property)--that might be a way to formally "save" price-taking, but it doesn't match the notion of price-taking as it's generally used.
4. Finally, perfect competition is a concept which can be described informally, so it should be. Formalisms can be in the text of the article, but someone who's not getting even a bachelor's degree in Econ should be able to follow most of the article. Cretog8 (talk) 17:38, 22 July 2008 (UTC)

Request

I'm probably Doing It Wrong on this here talk page, but whatever. This article is almost completely incomprehensible. It was obviously largely written by someone from the Ivory Tower. It's not useful to me, or to the vast majority of people who are looking for a relatively easy to understand explanation of what perfect competition actually is. It's filled with difficult-to-penetrate jargon.

Examples:

Some subset of these conditions is presented in most textbooks as defining perfect competition, but the advanced textbooks (e.g. Mas-Colell et al. 1995 p. 315) agree with the above definition centered on equilibrium price taking, which focuses on the single analytical assumption distinguishing the determination of perfectly competitive equilibria from that of imperfectly competitive ones; the conditions listed above are considered intuitively to provide sufficient conditions for price taking, a rigorous proof that indeed they suffice being still lacking (Kreps 1990, p. 265)."

The citations are wonderful, I guess, but I've read that sentence (yes, it's just one sentence) three times, and I still have no idea WTF it's saying.

Other examples:

The importance of perfect competition derives from the fact that only if prices are treated by consumers and firms as parameters does one obtain the standard maximum utility condition that the marginal utility of the last unit of money spent on each good must be the same, as well as the standard maximum profit conditions that the firm must produce the quantity that renders the marginal cost equal to the product's price, and must employ the quantity of a factor that renders the factor's 'price' (i.e. rental) equal to the factor's marginal revenue product.

Again, that's just one sentence.

In neoclassical writers the need for price taking together with the aim to show that supply and demand also determine equilibrium prices in markets without production (factor markets; or exchange economies, e.g. a prisoners-of-war camp where prisoners exchange soap against cigarettes among themselves) favour two tendencies: first, an increasing separation of the inability to affect normal price from its original classical basis in free entry and hence in long-period adjustments; second, the tendency to conceive competition as the more perfect, the faster agents discover more favourable exchange opportunities and exploit them (e.g. the faster a seller loses his custom if he charges a higher price than other sellers), with the implication that the more perfect the competition, the faster the average market price adjusts in response to inequalities between supply and demand; thus nowadays one finds occasional statements that perfect competition implies that equilibrium between supply and demand is reached instantaneously; and perfect competition is also taken to imply a tendency of price to increase as long as supply is less than demand, and to decrease in the opposite case.

Wow, that's a hell of a sentence. (Yep, just one sentence.) And it's almost completely incomprehensible unless you're already an economist, in which case, you won't be reading this entry in the first place.

If I wanted a graduate text on economics, I'd buy one. I have no doubt that Mimuli put a great deal of effort into this page. It shows. But that doesn't mean it's not a crappy entry. It's unreadable and impenetrable. It is NOT necessary to have a graduate dissertation on perfect competition in order to have a good (dare I say comprehensive?) understanding of perfect competition.

I can't be the only one who feels this way about this entry. I wouldn't have a problem with it if there was a medium-depth overview on what perfect competition is, why it's efficient from a production and allocation PoV without having to wade through a bunch of graduate-level nonsense. You can look at some of the physics entries for examples on how to do it better. And frankly, this last sentence I've quoted is the English-language version of spaghetti code -- as is most of the rest of this entry.

--Rstockbower (talk) 15:25, 27 July 2008 (UTC)

---

Rstockbower, I think you're exactly right and I've began to try and rewrite some of this to make it more comprehensible. At the same time I'm trying to preserve the original meaning - and sometimes I'm not sure what the original is trying to convey (and I am an economist) or if it is in fact correct. For example I left the statement below, taken from the original: "It should be noted that a general rigorous proof that the above conditions indeed suffice to guarantee price taking is still lacking (Kreps 1990, p. 265)." Surely this can't be literally true. In some models, product homogeneity is sufficient to guarantee price taking (Bertrand). In others free entry and zero profits do it. What I think the sentence is trying to say is that there's no general way to relate perfect competition to various forms of imperfect competition. However, I left it in just in case my interpretation is incorrect. radek (talk)

Uggh, now I've remembered why I ceased working on this article. It is hopelessly confused and messy and essentially beyond fixing in its original form. And way too long. The intro is way too long for sure. As a consequence I'm gonna cut the Gordian Knot and cut large portions of it. Stuff can be added back in later. But please, in a COMPREHENSIBLE way. radek (talk) 01:26, 30 July 2008 (UTC)

---

radek, I'm glad I'm not the only one who felt this way. I felt like a bit of a jerk above, thinking maybe I was the only one who felt that way. Honestly, I think at this point it would be in the entry's best interest to completely scrap the entire thing and start over. Or revert back to a much earlier version and go from there. Sometimes that's the best way to fix something that's next to unfixable. Unfortunately I am not the one to do such a thing because I don't know enough about the topic.

--Rstockbower (talk) 18:08, 31 July 2008 (UTC)

You people think pure and perfect competition is same thing

There is theoretical diff between pure competition and perfect competition. there are 2 main assumptions 1. perfect information (which you have included ) 2. perfect mobility of resources.(which i guess do not have same meaning as "transactions cost equal to zero".)

If these two assumptions are missing then it is a pure competition.

This means resources (factor of productions) are equally distributed.

Give me a single reference of any good book which says that both are equal. I can give you reference of ten books which says that these 2 things are entirely different.

I request you people to make a new page for pure competition.

Achalmeena (talk) 01:51, 7 September 2009 (UTC)

Can you start with a particularly good reference on the difference? CRETOG8(t/c) 07:05, 7 September 2009 (UTC)

Fudging the assumptions

1. "A perfectly competitive market may have several distinguishing characteristics, including: [not "may have" "does have"]

1. Many buyers/Many Sellers – Many consumers with the willingness and ability to buy the product at a certain price, Many producers with the willingness and ability to supply the product at a certain price.[no an infinite number of buyer and producers - infinite supplies of factors of production labor capital materilas all instantaneously available for transfomation\

1. Low-Entry/Exit Barriers – It is relatively easy to enter or exit as a business in a perfectly competitive market.[there are no barriers to entry zero - you want to enter the markets quicker than the thought can cross your mind you are there][

1. Perfect Information - Prices are assumed to be known to all consumers and producers.[2] [3] [All economic actors are omniscient - they have to be to make the calculations that are fundamental to consumer choice theory - in making a decision as to whether to buy a beer a consumer will instantaneously assess all consequences of her decision now and for the next 20 years or whatever her life expectancy is. There may be consequences that extend or occur beyond the consumer's life but they would be of no concern to a consumer who acts soley in her self-interest.]

1. Transactions are Costless - Buyers and sellers incur no costs in making an exchange. [4] [ no cost - no sunk costs, no transportation costs, no advertising, no construction costs, no information costs - you want a factory to build widgets poof its there]

1. Firms Aim toItalic text Maximize Profits - Firms aim to sell where marginal costs meet marginal revenue, where they generate the most profit.[they don't aim they do robotically produce precisely where MR-MC there is no choice or decision making involved]

1. Homogeneous Products – [The characteristics of any given market good or service do not vary across suppliers.[the products goods and service are absolutely identical in every respect]--Jgard5000 (talk) 14:54, 24 September 2009 (UTC)jgard5000 How is this possible unless every consumer has the sams preferences?--Jgard5000 (talk) 00:00, 26 September 2009 (UTC)jgard5000 That consumption is an entirely personal and subjective experience. Solomon, Bamossy & Askegaard, Consumer Behavior A European Perspective, (Prentice Hall 1999) at 16.

The test of a scientific theory is whether the assumptions produce refutable hypotheses that can survive empirical testing, Thus critiquing the assumptions of perfect competition is really not a proper attack - the question is given the assumptions can you derive can you deduce hypothese that are verifiable and reloable. --Jgard5000 (talk) 11:15, 27 September 2009 (UTC)jgard5000 The objection is the failure to confront the full implications of the assumptions by watering them down. --Jgard5000 (talk) 11:17, 27 September 2009 (UTC)jgard5000 Of course the author had presented the assumptions in more or less the form they traditionally appear in principles text and maybe for purposes of intro texts water=downed assumptions are OK and likewise for this article.--Jgard5000 (talk) 11:19, 27 September 2009 (UTC)jgard5000 Assumptions in this form are "sufficient" for using the standard model as a first approximation of the beahvior of economic actors. It is only when you assert precision mathematical that the stronger versions are needed.--Jgard5000 (talk) 11:22, 27 September 2009 (UTC)jgard5000

One assumptioin of PC is that all firms are price takers - generally stated as, "Producer perceive the demand for their products as being perfectly elastic." If producers have perfect knowledge they would know with 100% accuracy what the price was and the nature of the demand curve they were facing - further they would be infinitely sensitive to any price change. Plus with a deterministic model the slightest change in production would be instantaneously translated into a change in price. --Jgard5000 (talk) 11:35, 27 September 2009 (UTC)jgard5000 in other words the assumptions of elasitic firm demand curves and negatively sloped market demand curves and perfect knowledge are contradictory and that is a problem--Jgard5000 (talk) 11:35, 27 September 2009 (UTC)jgard5000

Note that if a firm has any degree of market power then it would also have a marginal revenue curve and the firm would maximize profits by producing that quantity where MR = MC. So to relax any of the assumptions would totally change the analysis of PC markets.--Jgard5000 (talk) 00:32, 30 September 2009 (UTC)jgard5000

Sufficient but not necessary conditions

If by perfect competition one means 'price taking behavior' or 'p=mc' then the listed conditions are not necessary, just sufficient. A Bertrand market with two firms (so no atomicity or free entry) gets you those. Different technologies (costs) or information will give you limit pricing. It would be useful to have a more precise definition of what is meant by 'perfect competition' - Ostroy has a bunch of work on this, among many others.radek 02:29, 12 July 2006 (UTC)

The listed conditions are contrary to those required by for a PC market structure.--Jgard5000 (talk) 00:35, 30 September 2009 (UTC)jgard5000

The Benevolent Auctioneer Sets the Price

If everyone is a price taker who sets the price - the conventional answer is that the interaction of market forces sets the price. Of course, market forces are simply the combined effect of individual actions. The neoclassical answer is discussed in a paper by Cameron M. Weber New School for Social Research New York, USA entitled A Critique of Walrasian Equilibria ''in the Edgeworth Box February 2008

The most-often used “axiom” to arrive at the Walrasian equilibrium (again defined where there is a set of prices which fully matches all buyers and sellers of an economy‟s goods leaving no excess demand and no further trades making anyone better off without making someone else worse off) is what is known as the (benevolent) Auctioneer3.

To capture the logic of the Walrasian assumptions, imagine a third party – called the Auctioneer – whose job it is to suggest price ratios at which we might find trade and the ensure that no trading takes place until prices are found such that market clear. The Auctioneer simply announces various prices, and for each price we indicate how much of one good we are willing to exchange for the other. This hypothetical process continues until a market- clearing price is hit upon (that is a price is found such that my desired purchase of your Y are exactly offset by your desired sales of Y, and similarly for the other good. Under reasonable assumptions, there is at least one price ratio that will accomplish this, and when it is found, market-clearing trades take place and the resulting allocation – called the competitive equilibrium – will be Pareto efficient (Bowles, p. 212).

As Beinhocher points out one of the problems with this "answer" is that given the number of transactions that take place daily it would take about 15 qintillion years for general equilibrium to be eatablished. Do we have time?--Jgard5000 (talk) 10:02, 24 September 2009 (UTC)jgard5000 Sorry my memory failed me - According to a study by Herbert Scarf, it would take " a mere 4.5 quintillion years for the economy to reach general equilibrium after each exogenous shock." Beinhocker, The Origins of Wealth (harvard 2006) at 63. That is 4, 500 000 000 000 000 000 years. Given that the universe is 12 billion years old - 12,000,000,000 - there is a problem. Id.--Jgard5000 (talk) 10:05, 24 September 2009 (UTC)jgard5000 No need to fret the final death of the universe will occur approximately a trillion trillion years from now. --Jgard5000 (talk) 10:09, 24 September 2009 (UTC)jgard5000 The test of a scientific theory is whether the assumptions produce refutable asserttions that can survive empirical testing, Since markets more or less work every day things do get done while the gods work to achieve general equilibrium i would say that further testing is a waste of time.--Jgard5000 (talk) 10:09, 24 September 2009 (UTC)jgard5000

On the other hand since all economic actors have perfect knowledge why would they need the intervention of auctioneer - wouldn't they know where the new equilibrium would be? OF course, spinning this out - economic actors would not foresee exogenous shocks to the system - it is outside their ligt cone.--Jgard5000 (talk) 11:01, 1 October 2009 (UTC)jgard5000

Elimintaing excess profits

The explanation of the diagram states in part, "The arrival of new firms or expansion of existing firms (if returns to scale are constant) in the market causes the (horizontal) demand curve of each individual firm to shift downward, bringing down at the same time the price, the average revenue and marginal revenue curve" The entry of new firms causes the market supply curve to shift down which lowers the equilibrium price - which is reflectd in a downward shift of the demand curve. Jgard5000 (talk) 09:25, 8 October 2009 (UTC)jgard5000

heterodox view

This material on a heterodox view of competition was just added. I'm going to pull it out, primarily because it's unclear. It mentions (Clifton 1977 and Robinson 1962), but it's not clear that it's presenting their views of competition. There's a lot of different "heterodox" out there, so identifying whose heterodox thoughts they are is critical. It was also just fuzzy what the ideas were and how they relate to perfect competition. Anyway, I'm pulling it out, but maybe it can be clarified and put back in (or maybe it belongs in a different article?). CRETOG8(t/c) 02:07, 13 November 2009 (UTC)

It was unclear whether what was being rejected was the empirical relevance of perfect competition, it's methodological relevance or its theoretical definition.radek (talk) 03:16, 13 November 2009 (UTC)

Market Power and the PC firm

A fundamental assumption of traditional (neoclassical) theory is fims in a perfectly competitive market are price takers and face a perfectly elastic demand curve. However, the assumption of perfectly elastic demand curve and a negatively sloped demand curve are contradictory. As Keen notes the market demand curve is the summation of the firm demand curves and that one cannot add flat line segements to derive a negatively sloped demand curve. If you add line segments all you get is one long line. One response to this criticism is taht the firm "perceive" the demand curve as perfectly elastic even though it is not. However, this response violates the assumption of perfect knowledge. It is impossible to fool someone with perfect knowledge. A second response is that the output of each frim is infinitely small and that each firm's demand curve is represented by a point on the market demand curve. This explanation shares the problems of flat firm demand curves - if you add together a bunch of points you end up with a point (point have no dimensions). The answer is provided by one of the leading neoclassical theorists. Varian states, the firm demand curve has a "little bit" of negative slope and that the market demand curve should be viewed simply as an approximation of aggregate demand. Of course, first approximations lack the mathemaical precision infused into the theory of teh firm by the mathematization of neoclassical micreconomics and undercuts some of the assumptions of welfare economics particularly.--Jgard5000 (talk) 01:22, 1 August 2010 (UTC)jgard5000--Jgard5000 (talk) 01:22, 1 August 2010 (UTC)

Shutdown

"When a firm is making a loss, it will have to decide whether to continue production or not. This decision will, in fact, depend on the different total costs levels and whether the firm is operating in the short run or in the long run." - Firms produce only in the short run there is no long run production. Jgard5000 (talk) 14:26, 30 October 2009 (UTC)jgard5000Jgard5000 (talk) 14:26, 30 October 2009 (UTC) I suppose an interesting question is who is the firm - the managers, the stakeholders and do these actors devise and execute plans for the future of the firm and do these activities involve costs?--Jgard5000 (talk) 16:55, 22 August 2010 (UTC) jgard5000 - the planning and implementation costs would not be variable costs because they are not a function of output. Planning and implementation costs would be analagous to research and development costs - if fully incurred and paid while the firm is shutdown they would have no effect if production resumed. If amortized they would be fixed costs.

Is perfectly competitive firm's demand curve really flat?

The short answer is no. For a detailed discussion about residual demand curves see Perloff's text Microeconomics theory & applications with Calculus at page 245.--Jgard5000 (talk) 18:19, 12 September 2010 (UTC)jgard5000

Non-increasing returns to scale are necessary condition in order to ensure a sufficient number of firms

Constant returns to scale OR decreasing returns to scale ensure that the marginal costs are positively inclined, etc. The difficulty is only with increasing returns to scale which cause the marginal costs to be negatively inclined (big is beautiful: only one or very few firms in the market). I've made a correction. 150.203.177.97 (talk) 01:09, 9 March 2011 (UTC)

History

Just where did this idea come from? Who first put it down on paper? Who else contributed to it? And when did this happen? This article needs a History section. —MiguelMunoz (talk) 17:45, 10 May 2011 (UTC)

PC Firms have a "little" market power

Note that if a firm has market power, even a "little bit" then it faces a negatively sloped demand curve rather than the perfectly elastic curve assumed by PC theory = which means the firm would not produce where P equals marginal revenue but would follow the conventional rule produce where MR = MC.

As Kreps notes in one of the leading texts on microeconomic theory "firms assume they have no market power when in fact they have a litte bit." Kreps, A Course in Microeconomic Theory (Princeton 1990) at 292. Kreps goes on to note that the perfectly competitive model should be viewed as a first approximation of firms that have and realize they have a small amount of market power." Kreps at 292. Again market power means that the firms face a negatively sloped and highly elastic demand curve it also means that there is a marginal revenue curve at the firm and industry level.--Jgard5000 (talk) 15:30, 2 October 2009 (UTC)

It is also likely that the supply curve for a firm in a PC market is highly elastic if not perfectly so. Keen, Debunking Economics (Zed 2004) UK ISBN 1 85649 992 8. Finally, if the firm and industry demand curve is negatively sloped then it is not possible to have a single unigue demand curve for every point on the supply curve. The situation is analagous to a monopoly.Jgard5000 (talk) 18:24, 11 October 2009 (UTC)

Quite true. And it is fairly easy to show experimentally (via roleplaying or simulation) that firms who set MR = MC do not make as much profit as they could, whatever the current theory may say. -- Derek Ross | Talk 22:21, 28 August 2011 (UTC)

Examples

In Re Examples The first paragraph needs to go. Elasticity has nothing to do with perfect competition.

Plus, agriculture is closer to inelastic than elastic. Still learning the rules, will edit in a few days if I don't see objection.--Samadhi69 07:47, 5 February 2006 (UTC)

I took out the reference to elasticity. It actually does have to do with perfect competition (the fact that firms act as if they face perfectly elastic demand, or consumers face perfectly elastic supply, is sort of equivalent to the assumption of price taking) but not in the way that was implied by the sentence. As a side note, perhaps this article should note Vernon Smith's experiments which suggest that in practice one does not need a large number of perfectly informed agents for the result to look like a perfectly competitive equilibrium? radek 06:00, 6 March 2006 (UTC)

I would add that cross-price elasticity is a driving factor for perfectly competitive markets.

I would recommend taking out the example of street markets. Though certainly more information should provide evidence to the counterargument, "A Dynamic Model of Price Discrimination and Inventory Management at the Fulton Fish Market" (Graddy, Hall) provide evidence that there is market power and differentiation in a seemingly perfect market. Price discrimination is a common occurrence assuming that the food seller is not posting prices. Possibly adding the caveat to the example would help.

Additionally, the equity market example includes that brokerages carry market power because they can capture and manipulate the price of stocks. That in essence is not the failure of perfect competition. The way equity markets provide perfect competition is the transaction cost associated with the buying and selling of shares. It is the bid-ask spread that broker-dealers and specialists in auction markets make profit. And so an important detail to add is that highly-liquid stocks provide a superior example to perfect competition.

A similar example is the commodities futures market. Zero product differentiation due to standardization of contracts, multiple buyers and sellers in an open market with perfect transparency (open up a financial paper or look up the price online). (COMEX)

Mentioned earlier as well, I would object against the theory that the agri-market is not perfectly competitive. Seed and pesticide producers may have some market power (Total market share concentration Herfindahl-Hirschman Index=1449.63 according to USDA (1997)), and some other upstream producers may have market power, however final goods do not have market concentration (IBISWorld)--especially when sold within standardized commodities exchange contracts. The only exception is the United States Sugar Corporation, and international monopolies.

Some other commodities may have or still are under the control of monopolistic behavior and collusion (OPEC and oil).

I genuinely believe that the posters on this page and any other page which discusses subject matter I have great respect for should check their tone and the way they present their facts. In many instances I've provided evidence to my claims, of which I encourage to be refuted with further evidence to the contrary. Even as a scholar of the subject I know for certain that in comparison to the vast amount of fascinating information regarding economics I know a very small amount, but based on some of the comments and how glib they come across I'm almost positive I know more than those who claim to be experts by the way they write.

Thank you to those who provide published works to defend your facts. — Preceding unsigned comment added by Shore Leave (talk • contribs) 04:56, 3 March 2014 (UTC)

the assumptions

Economists borrowed the concepts of equilibrium and statics from physics. The problem for economist was applying a simple deterministic model to a complex system. The solution was straightforward. Eliminate the complexity through simplifying assumptions. [if the model doesn't fit the real world then change the world] The gain was a model that had mathematical precision and predictability. The sacrifice, realism. The assumptions of the traditional supply-demand model are not merely unrealistic they are absurd. (See Beinhocker, The Origin of Wealth (Harvard 2006). —Preceding unsigned comment added by Jgard5000 (talk • contribs) 15:14, 14 June 2009 (UTC) [statics requires a working knowledge of college algebra, rudimentary trigonometry and high school physics. I was doing basic mechanics in the eight grade.

Below I have listed some of the basic assumptions of the model. I'll let readers determine how closely these assumptions comport with reality.

1. Consumers sole motivation is to maximize utility - the satisfaction derived from the consumption of goods and services.

2. Producers maximize profits

3. All economic actors are completely rational (rock. paper, scissors, Spock, neoclassical economists)

4. Only circumstances that can be quantified count

5. All economic actors have perfect knowledge

6. All economic actors act independently they are not affected by the actions of others

7. Economic actors communicate only through price

8. There are an infinite number of consumers and producers and infinite “supplies” of factors of production

9. There are no barriers to entry

• No market power

• No advertising

• No control over resources

• No proprietary technology,

• No patents

• No trademarks

• No copyrights

• No geographical advantages

• No customer loyalty

• No branding or marketing

• No government regulation

• No collusion

• No labor contracts or trade unions

• No research and delopment costs

• No sunk costs

• No stocks of inputs

• No distribution networks

• No middle-men

• No economies of scale

10. No economists

11. Free entry and exit

12. Free mobility of factors of production

13. No inventories

14. All goods are instantaneously consumed - all products are instantaneously produced.

15. All goods and services are perfectly homogenous

16. No government

17. Time does not exist

18. System is closed and determisitic

19. No transaction costs

20. No information costs

21. All economic activities are flows rather than stocks - production is similar to gauging the flow of a river past a point - gallons per minute.

22. All economic processes consumption, production, distribution are perfectly efficient.

23.There are no externalities positive or negative -

• no pollution,

• no global warming,

• no second hand smoke,

• no litter,

• no graffitti,

• no unmowed lawns, n

• no nuclear waste,

• no landfills

• no public transportation.

• No network externalities,

• no knowledge spillovers,

• no public parks. —

• no barry manilow

--Jgard5000 (talk) 10:20, 24 September 2009 (UTC)jgard5000

--Jgard5000 (talk) 10:13, 24 September 2009 (UTC)jgard5000

The system preferred state is equilibrium in all markets. —Preceding unsigned comment added by Jgard5000 (talk • contribs) 18:39, 9 June 2009 (UTC)

Even though producers have perfect knowledge they "regard" the demand for their products as perfectly elastic. Even though the model is perfectly deterministic increases in production by a firm do not increase supply. —Preceding unsigned comment added by Jgard5000 (talk • contribs) 18:49, 9 June 2009 (UTC)

There are no externalities positive or negative - no pollution, no global warming, no second hand smoke, no litter, no graffitti, no unmowed lawns, no nuclear waste, no public transportation. No network externalities, no knowledge spillovers, no public parks. —Preceding unsigned comment added by Jgard5000 (talk • contribs) 13:31, 12 June 2009 (UTC)

A fundamental assumption of neoclassical economics is that markets tend towards general equilibrium - equilibrium in all markets. That is after every exogenous shock the markets return to their equilibrium state. The question is how long would in take a modern economy to achieve general equilibrium. According to a study by Herbert Scarf, it would take " a mere 4.5 quintillion years for the economy to reach general equilibrium after each exogenous shock." Beinhocker, The Origins of Wealth (harvard 2006) at 63. That is 4, 500 000 000 000 000 000 years. Given that the universe is 12 billion years old - 12,000,000,000 - there is a problem. Id.

For discussion of barriers to entry see wikipedia article. —Preceding unsigned comment added by Jgard5000 (talk • contribs) 11:39, 10 June 2009 (UTC)

I would challenge the reader or casual observer to spin out the full implication of these assumptions. For example, no market power and no market share implies that each firm produces an infinitely small quantity of product. If a firm produces a measureable amount of product then it is not a perfectly competitive firm. —Preceding unsigned comment added by Jgard5000 (talk • contribs) 16:40, 16 June 2009 (UTC)

I believe the "no government regulation" requirement should actually say "no government regulation of price or supply." —MiguelMunoz (talk) 08:46, 7 June 2014 (UTC)

Cryptocurrencies are not examples

The following parenthesis was removed from the head section

(especially decentralised digital commodities such as Bitcoin)

Bitcoin (and other cryptocurrencies) fail on several counts:

Perfect information: There is very little public information about the fundamentals of bitcoin, such as the volume of e-payment and its distribution by market and country, the volume of illegal trade, the amount of bitcoin hoarded and the price at which those hoards were bought, the likelyhood of regulations and legal restrictions, etc. As a result there is enormous information asymmetry, and intentional or accidental misinformation among traders.

Profit maximization: The economy of bitcoin is largely based on highy speculative expectations of huge gains in the long-term. These expectations are largely subjective, with little rational basis; so the "profit" cannot be objectively defined, and traders are often not concerned with short-term loss. Much buying is motivated by political ideology. Others buy bitcoin because it is believed to be safe for illegal payments rather than for monetary reasons.

Property rights: bitcoin accounts are anonymous, and the system is not submissive to any jurisdiction. So, while in theory national property laws could be applied to bitcoins, in practice it is very difficut to establish the property of the bitcoins in a particular account, i.e. whether the possession of its contents (by knowledge of its key) is the result of legitimate trade or donation, rather than the result of theft or fraud.

Rational buyers: The technical and economical aspects of bitcoin are too complex for the vast majority of traders to grasp. Besides contributing to the information asymmetry, this complexity results in trading decisions being taken by non-rational reasons, such as emotional feelings and undue extrapolation of past price history.

--Jorge Stolfi (talk) 20:36, 18 February 2015 (UTC)

The following paragraph was removed too, for similar reasons:

Perhaps the closest thing to a perfectly competitive market would be Bitcoin mining (along with the mining of several other digital currencies), due to its satisfaction of the gross majority of basic structural characteristics specified above.

Bitcoin mining (as opposed to bitcoin trading) fails in the "perfect information", "profit maximization" and "rational buyers" aspects. The motivation of miners include long-term unquantifiable and non-rational profit expectations, as well as ideological and illicit factors. The miners have highly asymmetric access to information about the state of the market (that determines their sale price). Also, a good part of the cost is investing in equipment, which has a useful life of a year or so at most; this investment is a significant barrier to entry. Also, the volatility of the price is such that the mining market is never close to equilibrium.
--Jorge Stolfi (talk) 20:47, 18 February 2015 (UTC)

Merger of Perfect competition and Perfect market

I suggest that Perfect competition and Perfect market be merged, as they are apparently about the same topic. Objections welcome. -- 62.156.58.179 (talk) 21:44, 9 April 2012 (UTC)

I suggest that Perfect market be merged into Perfect competion (not the other way round) because the latter article is longer. -- Dynam1te3 (talk) 21:49, 9 April 2012 (UTC)

I don't think it is appropriate for perfect market to subsume perfect competition. The other way around would make sense, perfect competition subsuming perfect market. Or you could just leave it. — Preceding unsigned comment added by 180.214.168.133 (talk) 10:34, 13 April 2012 (UTC)

I would be interested in what someone with a PhD in economics would have to say... Perhaps, a more appropriate way of settling this is to get an expert to distinguish the two for us. If the expert believes that they are not distinguishable, then my vote would likely be to merge Perfect market into Perfect competition not based on the fact that either one is larger but more on the fact the Perfect competition is one of the four primary "Market structures". — T13   ( C • M • Click to learn how to view this signature as intended ) 18:26, 28 April 2012 (UTC)

I second the suggestion that they be merged. — Preceding unsigned comment added by 209.54.12.236 (talk) 02:48, 25 March 2013 (UTC)

So I see that nobody has merged this article in the Perfect competition one yet. I think it should be done for all the reasons mentioned above and because the perfect competition article is of much superior quality. Should I simply delete this article and find a way to redirect the article to perfect competition? I'm not sure how this is done. GabrielSBeaulieu (talk) 03:36, 3 March 2015 (UTC)

Source for the conditions?

I've put a "citation needed" on the conditions in the introductory paragraph, because I wonder which of these are actually necessary conditions, and because this article has come under criticism from at least one economist ([1]):

“perfect knowledge” (whatever that means) isn’t an assumption of the perfect competitive model – no matter what textbooks or Wikipedia claim.

Also, the list here is different from that on the German Wikipedia, which is much shorter and makes perfect elasticity a condition, not a consequence, of the model. Can someone with access to the sources under References clear this up? FNAS (talk) 12:10, 17 April 2017 (UTC)

A Call for Clarity on the "Conditions"

I'm not an economist, I'm a lay reader, and I would like the article to elaborate on the conditions laid out in the first section. There are two questions I'd like the article to answer.

First, I'd like to know how the "No Externalities" condition excludes government intervention. Usually, when I read about perfect competition, "No externalities" and "No government regulations" are two separate conditions. It seems to me that externalities such as dumping toxic waste into a river would actually invite government intervention, to eliminate this externality.

Second, what does "no government intervention" really mean? In general, the role of government intervention is hotly debated, and I would appreciate a great deal more clarity on this. Usually, I hear that it means "no government regulation of any kind," when I suspect it really means "no government regulation of price or supply" or something more narrowly focussed like that. It's very clear how price or supply regulations would interfere with perfect competition, but it's not clear, for example, how or if worker safety regulations would violate the conditions of perfect competition. I would really appreciate some clarity on these questions. The old "Perfect Market" article has a better section on these conditions, but many questions like this remained unanswered. —MiguelMunoz (talk) 03:07, 21 July 2017 (UTC)

Dumping toxic waste into a river is indeed an externality. But since those are prohibited by definition, there's no need for government intervention. The theory of perfect competition simply doesn't deal with externalities. FNAS (talk) 10:36, 27 October 2017 (UTC)

The trouble with that explanation is that the "perfect competition" theory is often used to denounce government efforts to prohibit environmental protections, calling them "government interventions in the marketplace." Plus, the article's discussion of government intervention is all about cost (supply) and price regulations. It seems to me that a more narrowly focussed condition is called for. Isn't this condition really about price and supply? —MiguelMunoz (talk) 17:33, 26 February 2018 (UTC)

Macro vs. Micro discussion needed

As a professional engineer, I know a lot of engineers that are drawn to free-market theories without much actual knowledge of economics. When they discuss it, they seem to be treating the theory of perfect competition as if it were a description of the whole economy, rather than an individual market. So it seems to me that it would be helpful for this article to clarify that this is not a macro theory, and to explain what that means. (Since I don't have much training in economics, I'm not the one to write that section.) —MiguelMunoz (talk) 17:59, 26 February 2018 (UTC)

Free Software Can Be Bought and Sold At Market Price?

I inserted a "Contradictory" Tag at the end of this sentence: "Free software may be bought or sold at whatever price that the market may allow." The statement is not necessarily inaccurate but simply in need of elaboration - preferably with an example (accompanied by a reference) of how "free" software can have a non-zero market price such that it may be bought and sold. Without such elaboration - the sentence seems self-contradictory on its face. Hopefully someone with expertise on "Free Software" will add an example that explains and clarifies the matter so that the tag may be removed. Qdiderot (talk) 13:48, 15 September 2018 (UTC)