Question

Identify a market that enjoys perfect, or nearly perfect, competition. How do the competitors interact with each other and suppliers and customers?

Answer 1

One of the best examples of a nearly perfectly competitive market is the market for cereal. All firms are selling an almost identical product at very similar prices. However, these firms tend to increase the price of their product by differentiating it from the rest of the cereals in the market by introducing a new flavor, introducing a 'fat free' product, etc. Their are examples where new entrants in the cereal market produce exactly the same cereal as a competitor and sell it at a lower price to capture the market share. In some cases this works, but in most, it doesn't as the established brands have gained consumer confidence over the years and a new entrant producing exactly the same product at a lower price is seen as a cheap substitute for the 'premium' produce they are familiar with.