How Perfect Competition Increases the Interest of Consumers in the Company and Their Products

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This question was answered with a for and against argument structure, with a concluded answer to illustrate how perfect competition is always in the interest of the consumers. In my conclusion, perfect competition is always in the consumer’s best interest as the outstanding factor is the low prices that consumers get for their products and services. In addition another beneficial factor is that consumers ultimately have more power in the market over its firms as perfect competition is a consumer oriented market meaning if sellers displease a consumer then the consumer can easily choose to go to another firms as the prices are low everywhere which ultimately keeps firms alert. Furthermore firms lack monopoly pricing power which allows consumers not to be exploited by the firms and the firms will not be able to put costs back up as there will not be any long-run supernormal profits to add to the costs which is again beneficial for the consumers. (Sloman, 2003, p. 158) Moreover in perfect competition location plays a key role as firms that have the best locations usually generate the most sales rather than a firm that is not in a prime location. Hence the reason a location may play its part in a perfect competition market. However there may be limitations in customer service and product features which will lead to customers having more problems with their sellers due to the lack of customer service (Parikh, 2015).

The major disadvantage for consumers in perfect competition is that sellers will have no inducement to innovate or add more features to their product because in a perfect competition market, the profit margin is fixed and the sellers cannot charge higher prices as this may drive customers away. Hence why the sellers choose to keep selling their standard product at a price fixed by the market forces of supply and demand. In addition this will affect the consumer as they won’t see an improvement in their product and this may lead to frustration over time as sellers will be to hesitant due to the current climate of the market (Parikh, 2015). Furthermore perfect competition is a consumer orientated market meaning that sellers can’t afford to displease the consumer as they can quickly shift from one seller to another, hence the reason that perfect competition gives the consumers pleasure is because they can shift from one seller to another if they are displeased with the services or product. Another major advantage is that sellers will not possess any monopoly pricing power which leads to consumer exploitation being very low as well as not having much of an impact on the price of product or change the price higher than normal for the consumer (Parikh, 2015).

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Perfect competition can be seen as being in the consumer’s best interest by the prices being low as there are no long run supernormal profits to add to the costs of the service or product. In addition, consumers have the power to manipulate the market by tasting change, which will lead firms to respond, as well as increased consumer demand. This will lead to firms calling upon more supply with only a short run increase in profit and these two points lead to customer sovereignty (a situation that leads to firms responding to changes in consumer demand without being in a position to change it in the long run over its average cost). (Sloman, 2003, p. 158) The short run and the long run apply to perfect competition. During the short run in perfect competition, there is too little time for new firms to enter the industry meaning the number of firms stay fixed, depending on its costs and revenue or profit and loss. In the long run under perfect competition the period of time will be long enough for new firms to ultimately enter the industry. However this is dependent on the profit and loss, reason being if the profits are high this will ultimately attract new firms to the industry whereas if there is losses this will lead to firms leaving the industry. (Sloman, 2003, p. 150)

Perfect competition is built of five assumptions that create a market structure:

  • Firstly, all firms sell an identical product that is homogeneous which leads to no branding and advertising in their products
  • Secondly all firms are price takers and they cannot control the market price on their product as they have small portions of the industry supply and therefore they cannot affect the market price of a product.
  • Thirdly all the firms have a reasonably small market share.
  • Fourthly buyers obtain complete information about the product being sold and the changes of prices by firms.
  • Fifthly the industry is distinguished by the freedom of entry and exit meaning existing firms are unable to stop new firms setting up their businesses. (Anon., 2017) (Sloman, 2003, p. 150)
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