Perfect Competition

SMBA – 16 (Economics) Mitul Parikh Chetan Poojari Rakesh Ahire Phinsy Chirayath Kewal Mehta

Table of Contents

Introduction to Perfect Competition Case Study – 1 Case Study – 2 Case Study – 3 Pros and Cons Conclusion

Introduction

Perfect Competition describes markets such that no participants are large enough to have the market power to set the price of a standard product.

Perfect competition serves as a benchmark against which we can measure real-life and imperfectly competitive markets.

Introduction A market structure in which the following five criteria are met:

1. All firms sell an identical product. 2. All firms are price takers. 3. All firms have a relatively small market share. 4. Buyers know the nature of the product being sold and the prices charged by each seller. 5. The industry is characterized by freedom of entry and exit.

Sometimes referred to as "pure competition".

Introduction To determine structure of any particular market, we begin by

asking How many buyers and sellers are there in the market? Is each seller offering a standardized product, more or less

indistinguishable from that offered by other sellers Are there any barriers to entry or exit, or can outsiders easily enter

and leave this market?

Answers to these questions help us to classify a market into one of four basic types Perfect competition Monopoly Monopolistic Oligopoly

Credit Cards

Credit Cards

A credit card is a small plastic card issued to users as a system of payment.

Credit cards are issued by the banks which allows a card holder to purchase goods on credit.

All banks in collaboration with Visa or Master Card provides the facility.

Credit Cards

Credit cards are the classic example of perfect competition.

There are total 88 banks providing credit cards.

Varieties of cards. Segments of people using credit cards Indian Credit card Industry

Credit Cards

Payment options used by people in India.

24 % of consumers use Credit/debit cards.

Only Urban population use Credit cards.

Credit Cards

HDFC has the highest share at 23 %

Sellers and buyers are equally divided.

Perfect Competition.

Case Study 3: Stock Market

Stock Market is physical place where brokers or dealers gather to buy and sell stocks and other equities. The term is also used more broadly to include electronic trading (computers or telephone)

Constitutes of Stock Market

Stock Market

InvestorsFor e.g. FII

ParticipantsFor e.g. BHEL

IntermediariesFor e.g. ICICI Direct

Trading Network

NSE arrived with a fully computerized order book in 1994 called NEAT (National Exchange for automated trading)

This enabled to spend across to various towns and cities in India by setting up terminal connected to the central system through VSAT.

Trading in 1363 securities through 2856 VSAT terminals spread across 354 cities.

The difference in the price of the best bid and ask is called as Bid-Ask spread (indicator of liquidity in the stock)

List of Stock Exchange

Harshad Mehta Scam:

Harshad Mehta scam was exposed in April 1992 by the journalist Sucheta Dalal. The amount involved in the scam was approx. INR 4000 crore.

The scam was result because of the loopholes in the banking system which were exploited.

Main Reasons:- Bank Receipt- Ready Forward Deal

Bank Receipt : As the name suggest, BR acts as the receipt for the money received by the selling bank.

- It promises to deliver the securities to the buyer; In the mean time the seller holds the securities in trust of the buyer. - For this operation Bank such as Bank of Karad came handy which issued

Mehta with fake BR or BR without any backing from Government.- When Mehta gave this fake receipt for the same the bank give the money

without checking the credentiality of the document.

Ready Forward Deal :

The RF is secured short-term (typically 15-day) loan from one bank to another. It was this ready forward deal that Mehta and his associates used with great success to channel money from the banking system.

A typical ready forward deal involved two banks brought together by a broker in lieu of a commission.

This the brokers could manage primarily because by now they had become market makers and had started trading on their account. To keep up a semblance of legality, they pretended to be undertaking the transactions on behalf of a bank.

Regulatory Framework:- SEBI Act (1992): SEBI has been obligated to protect the interests of the investors in

securities and to promote the development and regulate the securities market. - Regulating the business in the stock exchanges, Prohibiting Insider Trading in securities,

Registering the working of Stock Brokers are the few core activities carried out of SEBI.

Advantages Of Perfect Competition

Optimal allocation of resources:economic efficiency.Maximization & effectiveness of utility, service.

Competition encourages efficiency: Tight competition between buyers.Buyers get efficient as they embrace change in the competitive market.

Customers Benefit:Low Price of products or service.

Perfect environment for Consumer:Customers need change.The response is driven my customers wish.

Advantages Of Perfect Competition

Disadvantages Of Perfect Competition

Less Profits:Cost of participating the competition. Profit Vs Investment.

Diversity of Products: Width & Depth of brands & products.Cost involved in developing and launching new product or service.

Disadvantages Of Perfect Competition

Limitations of Presentation:Product Designs. Product Specifications

Inequality: Unequal distribution of goods. (e.g. Harddisk)Unequal distribution of income. (e.g. Glister toothpaste)

Is Perfect Competition Realistic? Assumptions market must satisfy to be perfectly competitive

are rather restrictive In vast majority of markets, one or more of assumptions of

perfect competition will, in a strict sense, be violated Yet when economists look at real-world markets, they use perfect

competition more often than any other market structure Why is this?

Model of perfect competition is powerful Many markets—while not strictly perfectly competitive—come

reasonably close We can even—with some caution—use model to analyze

markets that violate all three assumptions Perfect competition can approximate conditions and yield

accurate-enough predictions in a wide variety of markets

Bibliogrphy

www.wikipedia.com www.rbi.com www.richmoney.com www.hdfc.com