I have added this entry to this blog's glossary, it being a myth within neoclassical economics.
Perfect competition
Neoclassical economics textbooks suggest that under “perfect competition”, markets deliver the best of all possible worlds. Countless small firms compete freely, prices reflect real costs, and no one has the power to distort outcomes. It is an elegant vision, and a total fantasy.
Assumption
In this ideal world, there are so many producers that none can influence the price of the products that they sell. All such products are assumed to be identical; all information about them is freely shared with everyone; new firms can enter or exit the markets in which these products are sold at will, with everyone having equal access to capital to enable this, and there are no barriers to entry of any sort. The "invisible hand" ensures efficiency, and there are no monopolies, no exploitation, no laws protecting intellectual property rights and no market power.
Reality
Almost none of these assumptions resembles the economy we live in. A handful of corporations dominate most industries; energy companies, banks, supermarket chains, and tech platforms are all of this sort, and they all seek to shape markets to their own advantage. They use advertising, lobbying, and legal firepower to keep competitors out. Patents and capital requirements create barriers to entry. Digital networks make success self-reinforcing: once a platform captures users, rivals rarely survive. Instead of many small players, we have a few global oligopolies extracting rents from everyone else.
This concentration of power undermines innovation and equality alike. Firms use monopoly profits to buy political influence, which in turn protects their dominance. The language of “competition” becomes a mask for power. Even when new entrants appear, incumbents often buy them out before they can threaten them, a process regulators too often bless as “efficiency”.
Why It Matters
The myth of perfect competition allows policymakers to ignore corporate power. It treats inequality as natural and monopoly profits as a legitimate reward for success. Yet when markets cease to be open, democracy itself is weakened: citizens become consumers trapped in systems they cannot exit. Real competition requires strong antitrust laws, fair taxation and public options in key sectors. Without these, markets cease to serve society; society serves the market.
Summary
Perfect competition has never existed outside the imagination of economists, but the power of monopoly is all too real.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Perfect competition has never existed outside the imagination of economists,………….
Given the massive lack of insight the so called science of economics seems to have into the real world, how on earth do economists manage ‘imagination’ I shudder to think of what Lennon’s song ‘Imagine’ would be like written by an economist although Tom Leher might have made a good go at it
I suppose there is another way of looking at this as well. If perfect markets worked in the way neo-classical economists hypothesise, there would have no need for mediaeval weights and measures legislation, assay offices and the like. It is clear that perfect competition is a fundamental myth that defies reality. It probably illustrates the uselessness of most of today’s economists.
The fact that so much of our modern world is built on fantasies about perfection and quasi religious beliefs in invisible hands, is deeply alarming.
That faith in such beliefs remains so deeply entrenched that modelling economic collapse is heretical is astounding in what is supposed to be a scientific discipline
Until economists come down from metaphysical notions of perfection and deal with the rather messy reality of a quantum world, we will get further an further away from the heaven on earth we seek
In an entropic universe, might perfection be ever only theoretical ?
Consequently, might it be that any theory that uses “ perfection” as a premise is not to be trusted?
Ditto any derivatives or developments of such?
“In theory, theory and practice are the same. In practice, they are not.” (Yogi Berra?)
Agreed – we must always be moving further from it. The second law of thermodynamics says so.
Nicely done.
‘Perfect competition’ is simply wilful ignorance, a rehash of the Adam Smith’s ‘invisible hand of the market’ which I have always seen as Smith’s acknowledgement of corruption to be honest.
Hello Richard.
Neoclassical economics likes to portray itself as a hard science, rooted in mathematics, and similar. With real hard sciences, theories are tested against the real world, and altered or discarded if there are disparities.Where’s the evidence of neoclassical economics doing the same?
It must also be considered that in real hard sciences, this only happens once one generation replaces another.This has not taken place in neoclassical economics, even though the generations have changed.
Maybe neoclassical theories are only a starting point or a reference point or some other excuse. Where then are the secondary theories that connect reality with the ‘perfect competition’ theory? There should be more than one trying to show pathways between or how we improve imperfect reality.
The truth is neoclassical economics exists to hide from the public that some humans want, and are achieving, a techno-feudal world of masters and serfs, even at the risk of ecosystem destruction. Total madness.
To believe in perfection is to forget everything that humans have learned since the time of Socrates.
Yes neoclassical economics uses perfect competition, but as an analytical benchmark, not an empirical claim. It’s like physics using frictionless planes: not realistic, but essential for understanding deviations from the ideal. As I am sure you are aware there is no shortage of neoclassical models which account for different market conditions: monopoly, oligopoly, monopolistic competition, asymmetric information, search models, contestable markets..the list goes on and is extensive.
Perfect competition is not an ideal.
You really don’t get it, do you? Policy is based on it, and it’s not just utterly unrealistic but totally socially destructive.
classical/received/orthodox economics has always missed a major economic factor; and that omission undermines all their theory. That is the failure to cost in their equations the environmental destruction embodied in most, possibly all, economic activity. In the profit loss columns, the environmental costs somehow disappear and are unaccounted for. (We know the reality that they want to ignore – we and future generations pay for the capitalists’ destruction out of our pockets).