What are disadvantages of perfect competition?


Quick Answer

The disadvantages of perfect competition are no scope for economies of scale, lack of product differentiation, reduced research and development expenditures, reduced incentive to develop new technology and the potential for market failure. Perfect competition is largely a theoretical concept.

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Full Answer

Perfect competition is an economic market structure characterized by numerous small firms that have no individual control over price, no barriers to entry or exit, perfect information among market participants and the absence of product differentiation. Markets for agricultural products and commodities are the closest real world examples of perfect competition.

Because a perfectly competitive market is comprised of numerous small firms, economies of scale that benefit larger firms are nonexistent. A firm that grew much larger than its competitors would incur fixed costs that would make it financially unfeasible. Perfectly competitive markets also result in dull, homogeneous products because a seller has no incentive to differentiate his product, as everyone is selling the same thing: rice is rice, and iron is iron. Homogeneity reduces the incentive to invest in research and development, as a firm is unwilling to invest resources in activities that, because of perfect knowledge, will benefit the entire industry. Finally, absent government intervention, perfectly competitive markets are prone to market failure when impacted by externalities such as bad weather or supply shocks.

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