Editing Perfect competition (section)

==Idealizing conditions of perfect competition==
The definition of perfect competition is when the following conditions all hold:<ref>Bork, Robert H. (1993). The Antitrust Paradox (second edition). New York: Free Press. {{ISBN|0-02-904456-1}}.</ref>

* '''A large number of sellers and buyers''' – A large number of consumers with the willingness and ability to buy the product at a certain price, and a large number of producers with the willingness and ability to supply the product at a certain price. As a result, individuals are unable to significantly influence prices.<ref>Gretsky, Neil E, Ostroy, Joseph M & Zame, William R, 1999. Perfect Competition in the Continuous Assignment Model. Journal of economic theory, 88(1), pp.60–118.</ref> One requirement for this is [[economies of scale|non-increasing returns to scale]] (including [[network effect]]s), ensuring that a monopoly doesn't push out competitors.
* '''[[Product (business)|Homogeneous products]]''': The products are perfect substitutes for each other (i.e., the qualities and characteristics of a market good or service do not vary between different suppliers). 
* '''Utility maximizing participants''': [[Homo economicus|Rational buyers]] always attempt to maximize their [[economic utility]] and sellers attempt to maximize their profit.
* '''[[Perfect information]]''': All consumers and producers know all prices of products and utilities they would get from owning each product.<ref name="Robinson, J. 1934"/>
* '''Zero [[transaction cost]]s''': Buyers and sellers do not incur costs in making an exchange of goods. This includes no barriers to [[Barriers to entry|entry]] or [[Barriers to exit|exit]] (no [[sunk costs]]) and perfect [[factor mobility]] where the [[factors of production]] are perfectly mobile and costlessly, allowing workers to freely move between firms and other adjustments to changing market conditions.<ref name="Robinson, J. 1934">Robinson, J. (1934). What is perfect competition?. The Quarterly Journal of Economics, 49(1), 104-120.</ref>
* '''No [[externalities]]''': Costs or benefits of an activity do not affect third parties. This criterion also excludes any [[government intervention]].
* '''Well defined [[Property rights (economics)|property rights]]''': These determine what may be sold, as well as what rights are conferred on the buyer.

While no real market is perfect, many markets are considered to be near enough to perfect for predictions from economic theory to be reasonably accurate. It has been proven that if the above conditions hold, that every participant will be a [[price taker]] and will not have [[Market power|market power to set prices]], and all sellers will operate such that their [[marginal costs]] equal their [[marginal revenue]].

There are many instances in which there exist "similar" products that are [[Substitute good|close substitutes]] (such as butter and margarine), which are [[Marginal rate of substitution|relatively easily interchangeable]], so that a rise in the price of one good will cause a significant shift to the consumption of the close substitute. If the cost of changing a firm's manufacturing process to produce the substitute is also relatively "[[Materiality_(auditing)|immaterial]]" in relationship to the firm's overall profit and cost, this is sufficient to ensure that an economic situation isn't significantly different from a perfectly competitive economic [[Market (economics)|market]].<ref>Roger LeRoy Miller, "Intermediate Microeconomics Theory Issues Applications, Third Edition", New York: McGraw-Hill, Inc, 1982. <br> Edwin Mansfield, "Micro-Economics Theory and Applications, 3rd Edition", New York and London:W.W. Norton and Company, 1979. <br> Henderson, James M., and Richard E. Quandt, "Micro Economic Theory, A Mathematical Approach. 3rd Edition", New York: McGraw-Hill Book Company, 1980. Glenview, Illinois: Scott, Foresmand and Company, 1988. <br> John Black, "Oxford Dictionary of Economics", New York: Oxford University Press, 2003. <br> Tirole, Jean,  "The Theory of Industrial Organization", Cambridge, Massachusetts: The MIT Press, 1988.</ref>