This article is my attempt to explain the characteristics and faults of a perfectly competitive market in terms of the dhabas that are set outside my college. Now, I am not talking about the dhabas that are selling chicken butter masala and shisha. I am only talking about the stalls selling maggi and alloo paratha !!!
I know that it might not exactly fit into the traditional economic analysis aspect as in practise a perfectly competitive market is really hard to exist. It is completely theoretical. But I could not help but notice that there exist certain striking similarities:
Homogeneous products – This characteristic of perfectly competition states that any market good or service do not vary across suppliers.
Well...All the dhabas are selling the same menu (more or less) consisting of pakoras, parathas, magi, cha, cigs.
Zero entry and exit barriers – There any no restrictions in terms of entering into the market. It is an important criterion that separates this market from imperfect forms of market.
Now, if this characteristic is taken into consideration it is true because any one of us can actually set up a dhaba by the side of the road with an initial capital investment of 12 grand. Get some “chotu” and “anna” to look after the shop, keep studying and reap a certain percentage of the income in the shop!!! Simple isn’t it?
Perfect information – All the buyers and sellers are assumed to have perfect information regarding the quality and the price of the product. This is actually the characteristics that make a perfectly competitive market to exist in real life scenario because in practise it is not possible to fulfil this criterion.
But just for the purpose of this analysis let us assume that we have been to all the dhabas and tasted their products and know exactly how each one tastes thus having a clear idea about the quality and the prices in each stall. Is that not what we do to know which one is our favourite stall?? So, maybe it is possible in our scenario to have these characteristics.
Firms are price takers – This is another very important characteristic of a perfectly competitive market. The firms operating in this market are not at liberty to set their prices but the prices are decided externally via interaction of market supply and demand. Google “perfect competition” graphs and whole set of images pop up. So, I have not put it in this article.
Actually, if you think about it for a moment, these dhabas are performing in such a competive market scenario. It is the demand for the aloo paratha and the fact that the other stall is charging twenty rupees for a paratha makes them price at the same price. If they charge higher in any case no one will come. If they charge lower the other firms will get into a price war simultaneously making all of them out of business. So this is the similarity aspect I was talking about.
On the other hand remember how I said that there is a homogeneity in terms of the products and services, that characteristics might fail. The aloo paratha at one place can taste better to us than the other. May be dhaba “A” paratha, even though has the same pricing as dhaba “B”, has that extra something from somewhere and has been cooked in just the right way to remind you of the paratha made at home for breakfast. Thus, it will make dhaba “A” to you more preferable than “B” even though same product is being sold. This is consumer preference and exactly why a perfectly competitive market fails. In the real world this is an important factor to consider.
So how can dhaba “ B” fight back??Dhaba “B” can identify certain customers that are have preference to their place and provide that extra incentive that other place does not which while give them the edge.
One thing to be remembered here is the moment the homogeneity of the services provided ceases to exist, perfect competition might not be there anymore, which is another important reason why it fails and remains as a mere comparison tool and benchmarking to other important imperfect markets. Unfair isn’t it? considering if there was a perfect market in existence then there will not the any exploitation at all, no greed, no “jhamelas” at all !!!
Fierce Competition – Another characteristic for perfect competition is that there is immense amount of competition that will exist clearly because there are no barriers to entry. I will explain with a simple example:
I actually have my favourite dhaba named “D” plainly because of the credit facility that they have allowed me to have. Now, the stall owner “X” gets a new fellow, let’s call him “Y” from his hometown to help him in his shop. As days went by “X” taught “Y” all the tricks of the trade that were required to run the dhaba. What happened next is extremely critical even in the modern world today.
“Y” after learning the tricks of the trade opens his own dhaba right next to the “D”. He not only provides me credit facility and occasional freebies but also provides me added service.
So the big question remains can a perfectly competitive environment prevail anywhere around the world without its flaws? The answer is no according to me. We might find a market that has certain characteristics of the perfectly competitive market but will not be so. This is plainly because as the global environment becomes more and more competitive it becomes important for all firms to differentiate their product or services, just to have that added competitive advantage. So, what does the dhaba example teaches us?
It is exactly as “Y” replied to the owner of the dhaba “D” ..... “IT IS JUST BUSINESS”.....
I laughed and thought what a “Crisp, short and cut throat” reply!!!!!!
