Perfectly competitive industry

Q. why each of the following examples is not a perfectly competitive industry?

Under the perfect competition, the decisions of individual buyers and sellers have no effect on market price. Thus, each perfectly competitive firm in the industry is a price taker which means the firm takes price as a given, something determined outside the individual firm. There are four characteristics of perfect competition;

1. There are large number of buyers and sellers.
2. The product sold by the firms in the industry is homogeneous
3. Both buyers and sellers have access to all relevant information.
4. Any firm can enter or leave the industry without serious impediments.

1. One firm produces a large portion of the industry’s total output, but there are many firms in the industry, and their products are indistinguishable. Firms can easily exit and enter the industry.

The example above cannot be considered as a perfectly competitive industry because in this case mentioned in the question a, one firm has a large portion of the industry’s total output. It means that the firm significantly affects on the price of the industry. However, in a situation of perfect competition, individual buyers and sellers cannot have an effect on price. Accordingly, the example is not in a perfectly competitive industry.

2. There are many buyers and sellers in the industry. Consumers have equal information about the prices of firms’ products, which differ moderately in quality from firm to firm.

One of the characteristics of the perfectly competitive markets is that the product sold by the firms in the industry is homogeneous. However, in the example b, each product manufactured by each firm has a different quality. Therefore, the example cannot be related to the perfectly competitive market.

3. Many taxicabs compete in a city. The city’s government requires all taxicabs to provide identical service. Taxicabs are nearly identical, and all drivers must wear a designated uniform. The government also enforces a blinding limit on the number of taxicab companies that can operate within the city’s boundaries.

In the perfectly competitive industry, any firms can enter or leave the industry without serious impediments. That is, the government does not impose any regulations on the market, or the government should not prevent or interfere its market. However, as it is described in the example c, the taxicabs’ market is controlled by the government. From this point, the example is far from the perfectly competitive industry.