What Is Perfect Competition?

In economic theory, perfect competition occurs when all companies sell

identical products, market share does not influence price, companies are
able to enter or exit without barriers, buyers have perfect or full
information, and companies cannot determine prices. In other words, it is a
market that is entirely influenced by market forces. It is the opposite of
imperfect competition, which is a more accurate reflection of a current
market structure.

What Is an Example of Perfect Competition?

Perfect competition is a type of market where there are many buyers and
sellers, and all of them initiate the buying and selling mechanism. There
are no restrictions and no direct competition in the market as all the sellers
are assumed to sell identical or homogenous products.

Consider a farmer’s market where each vendor sells the same type of jam.
There is little differentiation between each of their products, as they use
the same recipe, and they each sell them at an equal price. At the same
time, sellers are few and free to participate in the market without any
barrier. Buyers, in this case, would be fully knowledgeable of the product’s
recipe, and any other information relevant to the good.

Imperfect Competition
In economics, imperfect competition refers to a situation where the
characteristics of an economic market do not fulfil all the necessary
conditions of a perfectly competitive market. Imperfect competition causes
market inefficiencies, resulting in market failure. Imperfect competition
usually describes behaviour of suppliers in a market, such that the level of
competition between sellers is below the level of competition in perfectly
competitive market conditions.

If ONE of the following conditions are satisfied within an economic market,

the market is considered "imperfect":

 Market firms are NOT price takers and hence have control over the
pricing of their goods and services;
 The market contains ONE seller or none;
 There are barriers to market entry and exit;
 There is information asymmetry between buyers and sellers;
 The market's goods and services are heterogeneous or differentiated.