The conditions

Pure and perfect competition is a model of the economic theory of the neoclassical school that describes a hypothetical market structure in which no producer or consumer has the power to set prices or over the decisions of other agents, and in addition everyone has the same access to information, which implies equality of origin positions in the commercial relationship. The price is then set by the confrontation and negotiation of everyone with everyone, without generating monopoly income.[4]​.

Pure and perfect competition represents one of the two extreme cases of market structures studied by neoclassical economists, the second being the case of monopoly. Perfect competition is assumed to allow equilibrium on all markets under very particular sufficient conditions. Each market must meet the following three conditions:.

The consequences of these three hypotheses are that, on the one hand, price is the only motivation to exchange or refuse to exchange in the market (and not quality, for example) and, on the other hand, the price is set by the market and is imposed on all the protagonists; There is then only one price for a single good, regardless of the place of sale.

Two hypotheses must be added that link the markets to each other:

These last two hypotheses allow for a long-term convergence of wage and profit rates between different economic sectors and different countries.

It is then a very restricted framework. The one-auctioneer hypothesis means that all offers and demands of economic agents are centralized by a virtual planner, who can thus determine the equilibrium price. This planner does not exist in a market economy, where decisions regarding the price of exchanges and the quantity exchanged are made in a decentralized manner. The neoclassicals have developed in the theory of general equilibrium the idea of ​​a progressive convergence of prices towards the equilibrium price; Walras introduced a "palping" mechanism and the idea of ​​an "invisible hand" has been recovered from Adam Smith. On the other hand, Sonnenschein's theorem in 1973-1974 has shown that the uniqueness and stability of the equilibrium are not assured using relevant hypotheses, thereby damaging the "probing" process developed by Walras.

Utilization

If the model of perfect competition occupies such an important place in economic modeling, it is first because it allows a mathematical analysis based on optimization, and also because equilibrium situations are mathematical "optimal" that verify certain properties of efficiency (Pareto), which allows for a positive message regarding the type of society that the model of pure and perfect competition seeks to model. The hypothesis of pure and perfect competition is used in the proof of the welfare theorems.

The principle of pricing at marginal cost

Based on the properties of competition, it is possible to demonstrate, in a neoclassical theoretical framework, that the price in pure and perfect competition is equal to the marginal cost and that, in the long term, the economic benefit is zero. Therefore, the supplementary hypothesis is introduced that each company has the objective of maximizing its profits, defined as the difference between total profits (GT = p . q) and total cost, so the company can play with the quantity, but always accepts the price P. In the short and medium term, if there is a beneficiary economic sector, companies will enter that sector: supply will increase and prices will decrease. The benefits of these companies on that market will decrease until they are exhausted.

Limits and criticisms of perfect competition

Real competition is different from the competition theorized by neoclassicals (particularly in Walras's vision). Three possible attitudes are deduced from this:

Los avances de las teorías de diversas corrientes económicas (neokeynesianos, teoría de los juegos, etc.) han llevado a distinguir entre varios tipos de mercado en los cuales la situación puede ser de competencia imperfecta. La competencia perfecta no es entonces más que otra situación entre muchas posibles. Este aporte teórico permite el desarrollo del análisis mesoeconómico, en sectores económicos concretos y de las ciencias de gestión.

Liberal market position

In sectors with increasing graded returns, openness to international trade favors concentration. The automobile sector is revealing of this trend, since in 1950 there were about 70 independent producers, while today there are approximately ten. This may entail a risk of attacking competition in the form of tacit understandings or contracts (cartelization). Most liberal countries interpret this as a problem and make laws that aim to ensure that the market is not distorted.

Even so, as far as the latter country is concerned, the attitude of the authorities evolves towards a competition policy (anti-trust), especially in 1974 with a change in jurisprudence of the Supreme Court of the United States, the abandonment of prosecutions and complaints against large brands whose processes lasted more than ten years (IBM and Xerox, for example) and the revision in 1983 of the guidelines of the Federal Trade Commission in a more liberal sense. Despite this, there are still large anti-trust lawsuits, such as Microsoft, still pursued by certain states, although the federal government has abandoned it.

The position of non-liberals

According to other analyses, especially alter-globalist or interventionist:

According to them, the privatization of public services without instituting rules would be the same as, after a transitional period, a transition from a public monopoly to a private monopoly (cartel).

What control mechanisms?

Other critics point to the mechanisms that are supposed to guarantee competition:

What cost?

According to the opponents of freedom of competition, it would have a cost, especially due to the fact that:

Classical economic theory states that the costs for the economic system are generally higher in cases of imperfect competition (cartels, oligopolies, dominant positions, corporatist professions...) or monopoly. We can then speak of non-competition costs.

An organization to be regulated?

However, most economists, although they consider that competition is rarely perfect, refuse to reject it as a form of organization, even though the rules of operation must be established. Some claim that the principle of natural monopoly, although it only concerns a small number of economic branches, shows the limits of the competition system, especially for so-called "network" activities, such as public services.

We can talk about two of the divisions of the competition:

The conditions

Pure and perfect competition is a model of the economic theory of the neoclassical school that describes a hypothetical market structure in which no producer or consumer has the power to set prices or over the decisions of other agents, and in addition everyone has the same access to information, which implies equality of origin positions in the commercial relationship. The price is then set by the confrontation and negotiation of everyone with everyone, without generating monopoly income.[4]​.

Pure and perfect competition represents one of the two extreme cases of market structures studied by neoclassical economists, the second being the case of monopoly. Perfect competition is assumed to allow equilibrium on all markets under very particular sufficient conditions. Each market must meet the following three conditions:.

The consequences of these three hypotheses are that, on the one hand, price is the only motivation to exchange or refuse to exchange in the market (and not quality, for example) and, on the other hand, the price is set by the market and is imposed on all the protagonists; There is then only one price for a single good, regardless of the place of sale.

Two hypotheses must be added that link the markets to each other:

These last two hypotheses allow for a long-term convergence of wage and profit rates between different economic sectors and different countries.

It is then a very restricted framework. The one-auctioneer hypothesis means that all offers and demands of economic agents are centralized by a virtual planner, who can thus determine the equilibrium price. This planner does not exist in a market economy, where decisions regarding the price of exchanges and the quantity exchanged are made in a decentralized manner. The neoclassicals have developed in the theory of general equilibrium the idea of ​​a progressive convergence of prices towards the equilibrium price; Walras introduced a "palping" mechanism and the idea of ​​an "invisible hand" has been recovered from Adam Smith. On the other hand, Sonnenschein's theorem in 1973-1974 has shown that the uniqueness and stability of the equilibrium are not assured using relevant hypotheses, thereby damaging the "probing" process developed by Walras.

Utilization

If the model of perfect competition occupies such an important place in economic modeling, it is first because it allows a mathematical analysis based on optimization, and also because equilibrium situations are mathematical "optimal" that verify certain properties of efficiency (Pareto), which allows for a positive message regarding the type of society that the model of pure and perfect competition seeks to model. The hypothesis of pure and perfect competition is used in the proof of the welfare theorems.

The principle of pricing at marginal cost

Based on the properties of competition, it is possible to demonstrate, in a neoclassical theoretical framework, that the price in pure and perfect competition is equal to the marginal cost and that, in the long term, the economic benefit is zero. Therefore, the supplementary hypothesis is introduced that each company has the objective of maximizing its profits, defined as the difference between total profits (GT = p . q) and total cost, so the company can play with the quantity, but always accepts the price P. In the short and medium term, if there is a beneficiary economic sector, companies will enter that sector: supply will increase and prices will decrease. The benefits of these companies on that market will decrease until they are exhausted.

Limits and criticisms of perfect competition

Real competition is different from the competition theorized by neoclassicals (particularly in Walras's vision). Three possible attitudes are deduced from this:

Los avances de las teorías de diversas corrientes económicas (neokeynesianos, teoría de los juegos, etc.) han llevado a distinguir entre varios tipos de mercado en los cuales la situación puede ser de competencia imperfecta. La competencia perfecta no es entonces más que otra situación entre muchas posibles. Este aporte teórico permite el desarrollo del análisis mesoeconómico, en sectores económicos concretos y de las ciencias de gestión.

Liberal market position

In sectors with increasing graded returns, openness to international trade favors concentration. The automobile sector is revealing of this trend, since in 1950 there were about 70 independent producers, while today there are approximately ten. This may entail a risk of attacking competition in the form of tacit understandings or contracts (cartelization). Most liberal countries interpret this as a problem and make laws that aim to ensure that the market is not distorted.

Even so, as far as the latter country is concerned, the attitude of the authorities evolves towards a competition policy (anti-trust), especially in 1974 with a change in jurisprudence of the Supreme Court of the United States, the abandonment of prosecutions and complaints against large brands whose processes lasted more than ten years (IBM and Xerox, for example) and the revision in 1983 of the guidelines of the Federal Trade Commission in a more liberal sense. Despite this, there are still large anti-trust lawsuits, such as Microsoft, still pursued by certain states, although the federal government has abandoned it.

The position of non-liberals

According to other analyses, especially alter-globalist or interventionist:

According to them, the privatization of public services without instituting rules would be the same as, after a transitional period, a transition from a public monopoly to a private monopoly (cartel).

What control mechanisms?

Other critics point to the mechanisms that are supposed to guarantee competition:

What cost?

According to the opponents of freedom of competition, it would have a cost, especially due to the fact that:

Classical economic theory states that the costs for the economic system are generally higher in cases of imperfect competition (cartels, oligopolies, dominant positions, corporatist professions...) or monopoly. We can then speak of non-competition costs.

An organization to be regulated?

However, most economists, although they consider that competition is rarely perfect, refuse to reject it as a form of organization, even though the rules of operation must be established. Some claim that the principle of natural monopoly, although it only concerns a small number of economic branches, shows the limits of the competition system, especially for so-called "network" activities, such as public services.

We can talk about two of the divisions of the competition: