To begin with, it should be noted that leading economists such as Mankiw (2011) consider that perfect competition is an economic model, the idealized state of the market, where individual buyers and sellers can not affect the price, but form it by their contribution to supply and demand. In other words, this is a type of market structure, where the market behavior of buyers and sellers is to adjust to the equilibrium state of the market conditions.
There are five main conditions that determine the market of perfect competition. Together, they ensure the existence of non-personalized free market in which the forces of supply and demand – or revenues and costs – determine allocation of resources (Krugman, 2010). Firstly, perfect competition implies that no economic subject can dictate its terms: no buyer can require special conditions for sale, no seller can influence production or market price of goods. Secondly, the product must be uniformed. Particularly, customers should not care where to buy this product or service. It should be emphasized that the goods must be uniformed in all senses. If this requirement is not met, seller that is offering a slightly different product will have some market power, and therefore, is able to influence the price. Then he can influence the amount of produced goods or services, which is incompatible with the concept of perfect competition.
If there are Zero Profits in Perfect Competition therefore no need for strategy, the graph reflects this situation.
Thirdly, it is the absence of barriers to entry or exit the market. In other words, any company or individual that has the desire to become a member of a perfectly competitive market, can enter it without any natural or artificial barriers. Fourthly, free access to information to all market participants – producers, consumers and resources owners. If they do not have perfect information on the options of resources usage, prices and other market information, the transaction will be made in a wide range of prices. This, among other things, can lead to a situation of bilateral monopoly in violation of competition (Pride, 2011). Fifthly, it is high mobility of factors of production such as labor, land, capital and entrepreneurial ability.
Also, it is essential to note that in perfect competition, the share of each firm in the market is very small, the market price does not depend on the volume of product sold by a single firm. This means that the demand curve for the products of this company – direct P is a constant, parallel to the horizontal axis. Moreover, the demand for a competitive firm’s production is infinitely elastic: in case of any, no matter how small, raise of a price to the market price, demand volume will be zero, and for any reduction of price it exceeds the productive capacity of the company (Baumon, 2005). It can be clearly seen on a following graph.
It should be mentioned that strategic interaction is a joint work of two or more companies with the aim to achieve strategic objectives, which reflect the long-term interests of the parties (Grant, 2010). As a rule, participating companies use existing assets and competencies and do not have to create them again. For instance, strategic interaction is very popular form of cooperation in the oil and gas industry, as it allows developing projects with high capital intensity. In particular, to mine on the deep water, which very hard to do in alone. Moreover, strategic interaction helps to minimize the economic risks associated with a large project, access to resources and new technologies, to optimize the supply chain, as well as easier meet regulatory requirements.