What Is Pure Competition? (Including Characteristics)

By Indeed Editorial Team

Published June 1, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Having a thorough understanding of how an industry works is important for a business. Exploring theoretical business situations such as pure competition, also known as the price-taker market, can help companies adjust their tactics to reach their target audiences. You can discover opportunities for market improvement by understanding price-taker markets. In this article, we explore what a price-taker market is, review its characteristics, compare perfect competition and pure competition, and answer some frequently asked questions.

What is pure competition?

Pure competition is a marketing structure where many sellers offer the same products at similar prices. Corporations have very limited control over the price of a product in price-taker markets. Price-taker markets are the opposite of a monopoly, in which one company has complete price control because of little competition. Marketers can use monopoly and price-taker markets as indicators to evaluate existing industries.

A price-taker market includes many suppliers of standardized products. Consumers determine market prices, and suppliers have no influence over those prices. For example, agricultural products, such as corn, wheat, and soybeans, have a price-taker market because of the low barriers to entry.

Related: What Is Market Positioning? How to Develop a Strategy

Characteristics of a price-taker market

The following are some characteristics of a price-taker market:

Various buyers and sellers

There are many sellers and buyers in a price-taker market. This direct competition can generate high demand and supply rates. There may be small shifts in demand and supply in price-taker markets, but the number of buyers and sellers typically remains consistent.

Similar products

Products in a price-taker market may resemble each other in packaging, colour, and shape without being the same. Similar products make it difficult for buyers to differentiate between them, resulting in them buying all products equally. Location and transportation have little impact on company profits, which means sellers rarely prioritize specific buyers when they market to all customers equally.

Related: What Is Product Differentiation? A Complete Guide

Comparable prices

The high number of competitors means that one business may not change a product's average price. For example, in a price-taker market, if a seller raises its price too high, buyers can easily find a lower-cost replacement. The average price of products remains consistent with price-taker markets because sellers compete for the same market share. Based on these similarities, buyers can switch between products without noticeable cost differences.

Different product knowledge

Price-taker market systems have different levels of buyer and seller knowledge. Buyers may have complete knowledge of product details like price and quality, while sellers have only partial knowledge of what prices buyers find acceptable. As an example, a seller may try to raise profits by buying cheaper materials while maintaining the same price. A buyer with complete knowledge knows that there are higher-quality products available at a higher price and may make their purchase elsewhere.

Equal product availability

There are minor differences in product availability because of variables such as type of transportation, weather, and location. Despite transportation differences, changes in delivery from sellers to buyers rarely affect the buyer's decisions. In a price-taker market, sellers may earn nearly equivalent profits regardless of transportation differences.

Variation of profits

Sellers in a price-taker market may have similar profits because they share comparable products, prices, consumer demands, types of transportation, and product knowledge. Profits can also vary slightly since every seller experiences some variation within every factor. Overhead costs, expenses, and salaries may influence the similarity of the profits between the sellers.

Simple entry and exit into the industry

There are very few restrictions on entering and exiting an industry in a price-taker market. Businesses in a price-taker market rarely invest substantial amounts of money in moving costs, product research, or production time. As new businesses enter or leave an industry, the success of the existing corporations may influence the rate at which they enter and leave. For example, if a company makes excessive profits, the market attracts more corporations.

Related: How to Land a Job in Any Industry: A Step-by-Step Guide

Pure competition vs. perfect competition

A perfect competition market is a theoretical structure that ensures full and symmetrical information for all producers and consumers, with no transaction costs. Despite the absence of monopolistic elements in a price-taker market, perfect competition implies perfection in many other respects, which doesn't include monopolistic elements. Perfect competition differs from a price-taker market in the following ways:

No control over market prices

Price-taker markets have minor price variations between products while still being able to adjust prices. In perfect competition, there is no control over market price. The sellers can't raise their prices or adjust demand when there is perfect competition.

Complete knowledge

A perfect competition market is one in which buyers are knowledgeable about product details and prices, and sellers have more knowledge about the prices offered by buyers. In a price-taker market situation, sellers may have incomplete information about offers while buyers may be fully knowledgeable about products.

Related: What Is Industry Knowledge? (With Levels and Examples)

Interchangeable products

Markets with perfect competition have identical products. There are no differences in quality, colour, packaging, or weight. In a price-taker market, a buyer can replace one seller's product with another seller's product for the same price because the products are similar, but not identical. Companies in price-taker markets may alter details of their products to increase profits and enhance product quality or size.

Flexibility

In a perfect competition market, resources and products are unaffected by factors such as transportation, location, or weather. This means that all sellers within the perfect competition market are equally available to all buyers. Transportation costs are also nonexistent in a perfect competition system. In price-taker markets, factors such as transportation, location, and weather can all cause minor deviations in product delivery and profits.

Fewer restrictions

An industry with perfect competition has no restrictions on the entry or exit of organizations. Companies are free to enter an industry with perfect competition without cost restrictions or initial fees. Price-taker markets have slight variations in how firms enter, leave, and profit because the sellers influence each other's actions and behaviours.

Greater profits

Perfect competition markets aren't responsible for paying salaries or overhead costs. Businesses only calculate profit in a perfect competition market. Some reasons businesses may earn maximum profits in a perfect competition market include:

  • Cost-free transportation

  • Complete knowledge

  • Persistent demand

Price-taker market FAQs

Here are a few frequently asked questions about price-taker markets:

What is a pure monopoly?

A company with a pure monopoly is the only seller in a market where there are no close competitors. Pure monopolies have significant pricing power within the market. There is only one supplier with significant market power that determines the price of its products. Pure monopolies have little competition because of their high barriers to entry, such as significant starting costs, powerful networks, and market influence. Gas, electric, water, cable TV, and local telephone service companies are examples of pure monopolies.

What is an oligopoly?

A few manufacturers dominate oligopolistic markets. The markets can be national, international, or local. Their fundamental characteristic is that they can set prices. Unlike a monopoly, where one firm dominates the market, oligopolistic organizations consider how other producers are likely to react to changes in prices. Pricing and output in an oligopoly are determined by strategic decisions based on what other oligopoly members may do in response to their potential changes. As an example, the oligopoly members can become more powerful within the market by forming a corporation with a group of companies that act as one.

What is monopolistic competition?

Monopolistic competition is a type of market competition where multiple companies sell similar but not identical products. Businesses in monopolistic competition compete on factors other than price, such as product differentiation. Monopolistic competition is an imperfect competition that varies between a price-taker market and a pure monopoly market. The concept of imperfect competition describes marketplace conditions that create market inefficiencies that reduce economic value by making the market less than perfectly competitive.

Unless there is some perception of difference among products offered by businesses in an industry, monopolistic competition cannot exist. Product differentiation is a major tool for competitive advantage, resulting from differences in product quality, location, service, and advertising. Monopolistic competition can exist if:

  • Many sellers compete for a small share of the market

  • Companies have a lack of interdependence

  • Collaborative pricing is unlikely

  • Businesses have some control over their pricing but have limitations due to close substitutes of similar products

What is market pricing?

The market price reflects the current price at which you can buy or sell an asset or service. Supply and demand determine market prices. For example, the cell phone market has many choices, but most providers follow one another in terms of the latest features and prices.

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