Sufficient knowledge

A homogenous product

If the product (or service) of one seller differed significantly from that of another seller, then each seller would probably be able to retain at least some of the customers, even at a very high price. These would be the customers who just prefer this seller's product (or service) to that of someone else. The assumption of homogenous products serves to rule that out.

But this assumption should not be taken too literally. No two potatoes are exactly alike. We are not assuming that the goods are alike: only that the goods produced by one supplier are good substitutes for those offered by another seller.

So, ‘Homogenous products" means all suppliers sell products that are perfect substitutes. If different sellers sold different products, then customers might be reluctant to switch suppliers when one supplier raises the price. They might stick with the supplier even at the higher price, because, even at the higher price, they like the product of that firm better than the product of another firm. Thus, homogeneity of products encourages price competition.

Some versions of the "perfectly competitive" structure include "perfect knowledge" as one of its characteristics – but, of course, "perfect knowledge" never exists in reality.

Perfect information is a little less clear than the other assumptions – we can hardly assume that people know everything there is to know! In practice, what is important is that each buyer and seller knows all about her or his opportunities to make deals, that is, knows the terms on which other market participants will buy and sell. Remember what we said in the paragraph on "many small sellers": a seller would assume that her or his customers would know if the competition were selling more cheaply. If the customers didn't know that they had alternatives, then even a very small seller might get away with pushing the price up, without losing many customers. Thus, the "perfect information" assumption complements the other assumptions. The assumptions that there are many small buyers and many small sellers, and the assumption of free entry, all mean that buyers and sellers have many alternatives of potential buyers and sellers to choose among. The assumption of sufficient information says that they know what those alternatives are.

Traders need to know quite a bit to compete effectively in markets. They need to know the terms on which other people are offering goods and services, or offering to buy; the quality of the goods and services offered, and enough about costs to judge whether the trade is profitable or not.

Дата добавления: 2014-01-11