Competitive and Complete Markets

When are Markets competitive and complete? Regarding economics, researching and lecturing economists often use two terms interchangeably – competitive and complete markets. While both these markets have certain similarities, they differ in their fundamental characteristics. In this blog post, we will dive deep into the concept of competitive and complete markets and explore their similarities and differences.

Definition of Competitive and Complete Markets: Understanding the Differences

In a competitive market, many buyers and sellers meet intending to exchange goods at a specific price (a form of social interaction). No market participant (neither buyer nor seller) can influence the market price at equilibrium. In other words, the market is competitive because no single market participant should be able to control the market price.

On the other hand, a complete market is a market where sellers and buyers trade all possible goods, and all possible contingencies are covered. In a complete market, due to the perfect market conditions and ability to exchange, the market prices all assets, and there is no uncertainty about future prices or events.

Similarities and Differences between Competitive and Complete Markets

While both competitive and complete markets have certain similarities, they differ in their fundamental characteristics. One of the key similarities is the existence of many buyers and sellers. In both types of markets, there should always be many buyers and sellers, and no single entity should have the power to influence the price.

However, the critical difference between the two markets is the level of information and the degree of uncertainty. In a competitive market, there is some uncertainty about future prices and events. In contrast, there is no uncertainty about future prices or events in a complete market.

Price Mechanism in Competitive and Complete Markets

The price mechanism plays a crucial role in both competitive and complete markets. In a competitive market, the price mechanism helps to allocate resources efficiently. The market forces (which are supply and demand) determine the market price of a good or service. In contrast, in a complete market, the price mechanism helps to allocate risks efficiently. The market forces (demand and supply) determine the price of an asset such that it reflects the risk associated with that asset.

Role of Markets in Society

In reality, markets could only become complete and purely competitive if society put an efficient set of rules (institutions) in place and enforced them via efficient social interaction. Generally, markets play a significant role in society by providing a platform for exchanging goods and services at lower transaction costs than other forms of coordination. Markets are the backbone of the modern economy, enabling individuals and businesses to allocate resources, goods, and services through buying and selling products and services. Markets provide a mechanism for price discovery, allowing buyers and sellers to agree on a mutually beneficial price for a particular product or service when they are complete and competitive.

Market Efficiency and Freedom of Choice in Democracy

The role of markets in society extends beyond just exchanging goods and services. Markets help allocate resources efficiently, ensuring products are produced and distributed to those who value them the most. The resulting competition among buyers and sellers helps to drive innovation and improve the quality of goods and services.

Furthermore, markets allow individuals to freely express their preferences and make choices about the products and services they consume. This freedom of choice is a cornerstone of modern society and democracies, enabling individuals to express themselves and pursue their interests.

Market Inefficiency, Externalities, and Information Asymmetry

However, markets have challenges. Market failures, such as externalities and information asymmetry, can result in inefficient outcomes. For example, a product can benefit firms selling the goods (e.g., cigarettes) but harm consumers’ health. Additionally, markets can exacerbate inequalities and leave some individuals marginalized. It is, therefore, important for governments and other institutions to regulate markets to ensure that they operate fairly and efficiently when necessary.

Conclusion

In conclusion, competitive and complete markets are two concepts economists often interchangeably use. While both these markets have certain similarities, they differ in their fundamental characteristics. On the one side, a competitive market should have many market participants, both buyers and sellers, and no single market participant should have the power to influence the price. In contrast, a complete market is a place of exchange where buyers and sellers can trade all possible goods, and all possible contingencies are covered. Finally, understanding the significant differences between complete and competitive markets is crucial for anyone interested in economics.

In closing, markets play a crucial role in society, enabling the exchange of goods and services, allocating resources efficiently, and allowing individuals to express their preferences. While markets can present challenges, it is essential to recognize their value and work to ensure that they operate fairly and efficiently.

Literature for Further Reading