Perfect Competition and Imperfect Competition in Markets; The case of Safeway Inc.

Introduction

In the market, there are many trends which determine the way the transactions are undertaken. The transactions are usually dependent on the characteristics of a market. The state of competition is one thing which influences the way transactions are. There are two common forms of competition; perfect and imperfect competition.

There are very many actions in different markets which depict the form of competition in the market. For example, the article ‘JC Penney stock jumps after upgrade’ dated Friday, 1 Nov 2013 can be analyzed to bring out the state of perfect as well as imperfect competition in the market. This is possible through looking at the benefits derived from perfect competition. It is also possible through looking at the protection of actions in the market by perfect competition. It is also possible through looking at the contrast of perfect competition and imperfect competition.

Imperfect competition

Imperfect competition is one type of market where the characteristics are not as in the perfect competition market. For example the rules governing the imperfect competition market are less strict than those in the perfect competition setting. There cases in imperfect competition where the sellers of a product are very few. This is referred to as the oligopoly form of imperfect competition. There is also the Monopolistic competition, where products which are highly differentiated are sold by very many sellers. There is also the monopsony form of imperfect competition, where the sellers of products are many but the buyer is just one. Oligopsony is the other form of imperfect market where the sellers are many but with few buyers.

Perfect competition

Perfect competition is also referred to as pure competition (Hoag & Hoag 2006). Perfect competition markets are the ones where no player is larger than the others in terms of setting the prices. This is because the rules involved in the control of the markets are very rigid. There are very dire consequences to any person who tries to manipulate the market in an illegal way. Looking at the case of JC Penny having the profits go up as a result of upgrade by the Wall Street firm ITG Investment Research, we can see the benefits of operating in a perfect market. We can see that the stocks rose in a market where there are infinite buyers and sellers as per the characteristics of perfect competition market. In such type of competition, there are enough buyers and sellers ready to play their roles in the market. It would have been an imperfect competition setting; the sellers would have been many but few or one buyer existing. This would mean that some products of the other players in the industry would remain in their possession since all the consumers would run to the stores of JC Penny. This makes the market fair to all players. This means that the stocks of this company rose as a result of decision by the buyers in the market. The buyers were ready to purchase the products of the company with the sellers ready to make supplies to the company as a result of good rating by the investment firm. This happened in the belief that the buyers are capable of making good decisions on what to buy. The perfect market provisions allowed the Wall Street firm ITG Investment Research to make such an upgrade since it believed in the capability of the buyers. Secondly, JC Penny’s stocks rose with the belief that the market had no entry as well as exit barriers. This would be different in an imperfect competition market where sometimes barriers to entry exist. This means that no competitors would respond to the upgrade and react towards reducing JC Penny’s popularity. In perfect competition, the market is believed to have no barriers to enter or leave a given market. On the announcement of the upgrade of JC Penny, new entrants were free to enter the market and give competition to this company. Therefore the fact that the market believed that the upgrade of JC Penny meant good things to come spelled a fair market. The fact that the upgrade was done without limiting entry to the market is an indicator of the freedom in the market and fair competition.

The stocks of the company went up as a result of investors believing that the company would make more sales and perform better as a result of buyers getting attracted more to the company. This would be in the belief that the market has perfect information. In a perfect competition market, the consumers and producers are believed to have perfect information on price, utility, quality and production. Therefore, the fact that there was an upgrade to the company does not mean that the company was favored for performance. The rise in the value of stocks is pegged on the fact that more buyers and sellers will be willing to engage more with JC Penny since they have the necessary information.

The fact that the clothing market is controlled by the correct property rights is a major indicator of the perfect competition in the situation of soaring of JC Penny’s stocks price. The prices rose without alteration of the rights governing the market. The buyers of the company’s products would not be given better rights than those of the competitors. The stock prices prices rose as a result of the belief that the buyers in the market would enjoy the perfect property rights in the market.

Perfect competition is also reflected by the fact that the products of JC Penny were not enhanced in terms of quality aspects. In perfect competition, there is usually the assumption that the products are homogenous. The suppliers are believed to give quality to all companies without discrimination. This means that the other companies have an opportunity to get the same suppliers to offer their products just as JC Penny. Therefore, the stock prices of JC Penny rose in an homogenous product market. It is also important to note that under perfect competition markets, there are no externalities. This means that actions of an action do not end up having negative impacts to third parties. For example, the upgrade of JC Penny does not affect the third parties in the market. This is because the upgrade is just an action in a fair market where evry player has an opportunity.

The belief of monopolies does not occur in the perfect competition setting. Monopoly refers to a situation where only one entity makes the supply of certain products. This means that the control of all aspects regarding a given product lies with the lone supplier. This puts the market at the mercy of the single supplier. The consumers are usually the most affected people since the prices in a monopolistic setting are usually hiked rapidly. It is important to note that several factors contribute to the existence of monopolies. One of them is economic barriers such as economies of scale, requirements of capital, advantages of cost and technological muscle. Legal barriers are usually very instrumental in the creation of monopolies. This is where the law permits only a few people to supply certain products.

Conclusion
For business people, it is always important analyze a market while in the planning process of how to go about the day to day operations. Perfect markets are usually the best for businesses to carry out their activities. This is because they offer an opportunity to the organization to enter into all activities that it deems beneficial. This is because there are no barriers to entry as well as exit. The organizations under such markets should be able to trust that the consumers and producers have the necessary information capable of placing an organization on level playing ground with the others. It is important to note that imperfect markets are not good for small businesses. This is because the big companies are able to control certain components in the market such as prices. This is because the rules are not strict as in the case of perfect markets. The case of monopolies occurs which has negative impacts to the market and especially the consumers. Looking at the benefits of the different forms of market is good enough to determine the direction a business should take.

References

Hoag, A. & Hoag, J (2006). Introductory Economics, World Scientific.