Overview
A Competitive market is a market where there is stiff competition among firms for market share. (see the assumptions below for an exact definition) In such a market, firms are not able to set the price of the product that they sell. That is, if they try to sell at a price higher than the current market price, other firms will compete them out of business. In particular, when there are no barriers to entry into the market, new participants will enter the market until the price moves back to its equilibrium value.
Supply and Demand
In a competitive market, the firm's supply curve is unaffected by the competitive environment, however, the demand curve is flat. That is, the price is fixed.
Assumptions
- Many firms and customers in the market
- Product is homogenous
- No barriers to entry or exit
- Perfect information
Deviations from Assumptions
The assumptions of competitive markets never hold in actuality. However, they are useful in that they can both simplify the analysis of the firm, and make apparent how deviations from the competitive assumptions affect the firm.
Michael Porter's groundbreaking work considers firm strategy in light of the deviations from competitive markets that are inherent in real economies.