The basic Competitive Model in Economics deals with a free market economy where the firms motive is the maximisation of profit and the consumers are well-informed. It is a situation of perfect competition where the prices cannot be controlled by any single buyer or seller but is decided by the market conditions. The firms are run to generate maximum profits for themselves and the consumers are rational. Certain features are observed in this model.
The good or service is assumed to be homogenous or identical. The is no difference in the goods or services in any way. For example, a person goes to buy tomatoes in the market and finds two sellers are selling the same quality of tomatoes. Here, the buyer has no preference to buy the tomatoes except the price so, whoever gives it at a cheaper rate his product bought. There are no preferences or brands so no customer loyalty present.
A large number of Buyers and Sellers
There are a large number of buyers and sellers in the market. The firms can easily enter or exit the market, no single buyer or seller has any control over market decisions. Single firm or customer do not play any role in the setting of the prices. For example, if an onion seller one day decides to stop selling onions it would not affect the prices of onion.
There is no power in the hands of a single buyer or seller it’s the market interaction of demand and supply that determines the price. For example, the prices of air conditioners are low in the winter season and in summers due to its high demand its price increases. The sellers produce their goods or services keeping in mind a high rate of profits. No individual has the power to create any impact on the prices of a good or service. Individuals who agree upon the market price and follow it are said to be price takers.
Well informed Buyers and Sellers
The buyers and sellers in this model have complete information about the product or service, as the knowledge is freely available. The seller is informed about the technology, prices, and production process. The producer is informed about the cost that is involved in the production process and what amount of incentives does he expect to gain. they try to gain maximum profits by reducing their cost of goods. The buyer is informed about the price prevailing in the market. The buyer makes an informed choice of how they would attain maximum satisfaction from their purchase as they are on a budget.
The Basic Competitive Model is not much applicable in real life as there are very few products in the market that are homogenous as every manufacturing unit tries to differentiate its product from the others. For Example, there are ten different brands selling toothpaste in the market today, everyone of them having a different property than another. ‘Colgate’ toothpaste has salt as an ingredient that its other competitors do not, differentiating its product from the other toothpaste.
The consumers are not able to take the decisions rationally as there are a lot of influencing factors that change the opinion of the consumers buying decision. Advertising and marketing are playing a major role in influencing the buying behaviour of the consumers that do not make the buying be rational. For example, the advertisement of ‘Fair and Lovely’ cream makes one believe that it would become fair if it uses it thereby influencing the purchase.
However, if studied theoretically this model clarifies the idea regarding how the market pricing decisions are taken and also helps in being the base to study other levels of competition that are present in the real market.