Pure Competition: Definition, Characteristics and Examples
Updated November 23, 2022
Learning how the market works within its industry is important for a business. Analyzing theoretical business situations like pure competition can help marketing teams adjust their tactics to reach their target consumers. Understanding pure competition can help you discover market improvement opportunities.
In this article, we outline pure competition by explaining the marketing condition and its characteristics, and the differences between pure and perfect competition.
What is pure competition?
Pure competition is a marketing situation where many sellers offer similar products for similar prices. In pure competition markets, corporations have little control of a product's price. Pure competition is the opposite of a monopoly, where one company has complete price control because of little competition. Monopoly and pure competition represent each end of the commerce spectrum that marketers can use to evaluate existing industries.
Related: What Is Market Segmentation?
Characteristics of pure competition
Some characteristics of pure competition include:
Multiple buyers and sellers
A pure competition market has many sellers and buyers. This competition can create high demand and supply rates. While pure competition markets may have occasional small demand and supply shifts, the number of buyers and sellers often remains reasonably consistent.
Prices are comparable
Since sellers have many competitors, a single firm may not change a product's average price. If sellers raise prices too high, buyers can purchase from one of many lower-priced competitors. In pure competition, all sellers offer products at similar average prices in order to stay in the market. Since prices rarely vary in pure competition, buyers can switch between products without noticeable cost changes.
All products are similar
In pure competition, all products are similar. Products may all appear to resemble each other in packaging, color and shape without being exactly identical. Since products are alike, buyers may not have product preferences and often will purchase all products equally. Likewise, sellers don't have buyer priorities and may market to everyone the same way. Environmental factors like the seller and buyer location or transportation have little impact on firm profits.
Different product knowledge
Sellers and buyers have different knowledge amounts in a pure competition system. Buyers have complete knowledge of product details, such as price and quality, while sellers have incomplete knowledge of what prices buyers may accept. For example, a seller may try to raise profits by purchasing cheaper goods while maintaining the same price. A buyer with complete knowledge knows there are higher quality products available for that price and can make a purchase elsewhere.
Product availability is similar
While there are minor differences in product availability because of variables such as transportation, location and weather, products are relatively available to all buyers. Changes in delivery from the seller to buyer rarely change a buyer's product decisions. While supply is equal for all firms, transportation of supply to sellers is not. Regardless of transportation differences, sellers may receive nearly equal profits in a pure competition market.
Easy industry entrance
Firms are free to enter and exit the industry without spending much money on moving costs, research and time. Since firms have no competitive advantages over each other, all firms earn normal and equal profits. The success of firms in the industry may affect the rate at which new firms enter or leave the business. For example, if a firm makes excess profits, the industry attracts new firms. If one loses profits, more may leave the industry. If a company earns normal profits, like in pure competition, there is no tendency toward firms entering or leaving the industry.
Variations in profits
In a pure competition market, all sellers make a similar profit because they all share similarities in the following factors:
Since every seller experiences some variation within each factor, profits can vary slightly as well. Also, in a pure competition market, companies pay overhead, expenses and salaries. Since all seller costs are similar, firm profits can remain almost identical.
Examples of pure competition
Here are a few examples of pure competition:
In this example, grocery stores essentially offer the same products and there isn't a wide distinction between one grocery store and a competing grocery store. Each competing grocery store will carry the same big brands, as well as offer its own generic versions of some foods and products, and will price its products similarly, with some exceptions.
Online retail stores especially are an example of pure competition. They will offer essentially the same types of products, such as clothing, shoes and accessories, and in relatively similar price ranges. They will also sell clothing, shoes and outerwear according to the season and generally offer sales at similar times of the year.
Products such as apples, bananas, lettuce and other fresh produce are an example of similar products sold at similar price points. Whether you purchase fresh produce at a local store or a farmer's market, you will likely find the same offerings with only slight price variations. You will also find the same kinds of competing products offered in organic or non-organic versions and sold seasonally.
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