Competitive markets

Markets that have the following characteristics are said to be perfectly competitive.

1. Many buyers and sellers -- no one buyer or seller has a significant share of the market.

2. No barriers to entry - producers can enter and exit the market freely and costlessly.

3. Homogenous products - there is no essential difference between the products offered by different producers.

4. Symmetric information -- all producers and consumers have the same information about the value of the product, production opportunities, etc.

Competitive markets are economically efficient which is why economists like them. In competitive markets none of the participants has any market power; that is, power to change the price as a function of how much they buy or sell. At the other extreme of market power is a monopoly (or monopsony) market where the seller simply sets the market price for all output. In most industries firms have some market power, so those industries fall between the book ends of competitive and monopoly markets.