Also sometimes referred to as perfect competition, pure competition is a situation in which the market for a product is populated with so many consumers and producers that no one entity has the ability to influence the price of the product sufficiently to cause a fluctuation. Within this type of market setting, sellers are considered to be price takers, indicating that they are not in a position to set the price for their products outside a certain range, given the fact that so many other producers are active within the market. At the same time, consumers have little influence over the prices offered by the producers, since there is no singular group of consumers that dominates the demand.
In reality, pure competition is more theory than actual fact. While there are rare situations in which a marketplace functions with pure competition for a short period of time, the situation normally shifts as various factors change the stalemate created by a multiplicity of sellers and buyers. This is often due to the somewhat stringent set of factors that must be present in order for the competition to be considered perfect or pure.
There are several essential characteristics that define pure competition. One has to do with the balance of buyers to sellers. When there is an infinite number of buyers who are willing to purchase the products offered for sale by an infinite number of producers, at a certain price, the opportunity for anyone to take actions that shift the market price is extremely limited. The price remains more or less the same, and the same number of buyers purchase the products from the same range of producers.
With pure competition, sellers can easily exit or enter the marketplace, without creating any undue influence on the price. Consumers continue to make purchases at the same rate, even if two companies leave the market and only one new one enters. The collective producers who are still in the market simply continue to produce enough products to meet consumer demand, without a shift in market price.
Businesses engaged in a pure competition market usually structure production so that they incur marginal costs at a level where they can earn the most profit. When the product line is homogeneous, this means the products produced are essentially the same as the product line produced by other suppliers in the marketplace. Assuming the costs are in line with marginal revenue, the business can generate a consistent profit for as long as the condition of pure competition is present in the market.