Perfect competition

The perfect market is a theoretical model of a homogeneous market economics. To study and understand complex relationships ( for example, pricing ) are often used with this simplistic model.

To form this model, the influencing factors are deliberately limited so that many factors - contrary to economic reality - as eliminable variables do not affect the model.

Definition

The perfect market designated under the Rational behavior and utility maximization a fictitious market, which has the following features:

• There are neither personal ( for example, by advertising), temporal ( eg opening times ) and objective (for example, quantity discounts, service differences ) nor spatial preferences (for example: location advantages, market point ).
• There is full market transparency.
• Homogeneity ( standard quality / equality) of the goods.
• Immediate reaction: All market participants react immediately to changes in market variables.

Meeting one or more of these assumptions turn out to be on the market, it is called an imperfect market.

Frequently for investigating a process, a Perfect market is assumed and only one of the points ( ceteris paribus clause) is changed so that the impact on the market conditions are unique to you and reference models can be obtained.

Reality

In reality, this type of market is not found and is not postulated as a desirable ideal. Equity trading on the stock market and the foreign exchange market are considered to be markets that come closest to the perfect market. The real estate market is a market that has a lot of imperfection.

Pricing on the perfect market

In a perfect market, there are no arbitrage opportunities, so that supply and demand at a common point, the market equilibrium, meet. The equilibrium price equals marginal cost. The vendors on the perfect market is not profitable. There is only one price at which the demand corresponds to the offer and the market is cleared. Providers can enforce a higher price than the equilibrium price, because they will find no takers due to market transparency. Buyers who want to pay less than the equilibrium price will not find a supplier on the market. This finding was first formulated by William Stanley Jevons as the law of one price / law of indifference. Empirically, its pricing is the faster, the less different the observed real existing market from the ideal-typical model of the perfect market.