In the previous article, we learned about perfect competition and its features. There are some derivatives of perfect competition. The most important variants of perfect competition market structure are:
1. Effective or Workable Competition
Competition among the sellers, even though it may not be perfect, can be regarded as effective if it offers real alternatives to consumers that are sufficient to compel sellers to vary quality, service and price substantially with a view to attract buyers.
The prerequisites of effective competition are as follows:
- Ready substitution of one product for another.
- General availability of essential information about alternatives (its significance lies in that buyers cannot influence the behavior of the sellers unless alternatives are known.)
- Presence of several sellers, each of them possessing the capacity to survive and grow.
- Preservation of conditions which keep alive the basis or potential competition from others.
- Substantial independence of action that is each seller must be able and willing constantly to reconsider his policy and to modify it in the light or changing conditions of demand and supply.
Effective competition cannot be expected in fields where sellers are so few ill number, capital requirements so large, and the pressure of fixed charges so strong that price warfare, or its threat of will lead almost inevitably to collusive (deceitful) understanding among the members of the trade of the industry concerned. In brief, competition is said to be effective whenever it operates over time to provide alternatives to buyers and to afford them substantial protection against exploitation. The concept of effective competition, though less definite, is more realistic and relevant than that of perfect competition.
2. Potential Competition
Potential competition may restrain producers from overcharging those to whom they sell or from underpaying those from whom they buy. The essential precondition for potential competition is the preservation of freedom to enter or to leave the market. The exclusive ownership of scarce resource, the heavy investment required for entry into many fields, the fixed character of much of the existing equipment, high costs of transportation, restrictive tariffs, exclusive franchises, and patent rights constantly operate to destroy the basis of potential competition. Science, invention and the development of technology constantly operate to keep this potentiality alive. Potential competition, insofar as its basis continues, may compensate in part for the shortcomings of the, lack of perfect competition.