Making a trip to New Orleans is somewhat of a rite of passage for any college student. The loud crowds and boisterous street life are essential to the native culture. We all remember how it feels after a night out on Bourbon Street, well maybe some of us. Regardless, one of the most iconic scenes of New Orleans is Café Du Monde. While waiting for delicious hot beignets, one gazes out to see the horse drawn tour carts. When we look to these carriages, we don’t think of how fun it would be to see the haunted voodoo streets of New Orleans. No. we put on my economic lenses and see a perfectly competitive economic model in action.
In economics, perfect competition market structure has five unique characteristics. First, all firms sell an identical product. Second, all firms are price takers — they take the price the market sets rather than set their own price. Third, all firms have a small market share. Fourth, buyers have complete knowledge about the product and its price. And lastly, it is easy for firms to enter and exit this market.
The classic example of perfectly competitive competition is agriculture. Take corn sold at the farmer’s market. Every seller sells roughly the same product at the same price, and we know what we’re getting when we buy corn.
Now let’s think about our New Orleans horse drawn tours. We get a tour of New Orleans, and the stops are usually displayed on the front of the carriage beside the price of the tour. Six different companies advertised the same $18 price for a tour, and each tour included eight historic stops. We have already met three of the five characteristics for a perfectly competitive market.
Some would argue it is impossible for tours to meet the fourth condition — that buyers have complete knowledge about the product and price. Well that’s true to some extent. As buyers, we don’t know if each tour is going to be as good as the next one. We may not know if each tour guide carries the same knowledge and charisma as the next one. However, this is where a unique unspoken characteristic about perfect competition enters. The ability to advertise sets firms apart. If one tour guide can advertise his tour in a way that captures more pedestrian traffic than all other tour guides, then he has gained an advantage and a greater part of the market share.
Perfectly competitive models are the go-to models in economic analysis, but they lack depth and reality. Planners who want to solve world problems try to find the answer by moving the supply and demand curves to the point of optimum efficiency.
Competition in the real world is more complex. F.A. Hayek noted the shortcomings of perfectly competitive models. He claimed that perfect competition eliminated all need for competitive activities. He viewed competition as all of the activities in the market that are made in an attempt to gain and transfer knowledge.
With the assumption of perfect knowledge, perfect competition eliminates the need for competitive activities at all. In reality, products are different and we lack complete information about their prices and features. Perfect competition is rare in the real world. The example of the historic tours in New Orleans is an anomaly. Consequently, competitive activity in the real world consists of activities which necessarily differentiate products from one another, and advertising in particular conveys knowledge to the consumer.
The model of perfectly competitive markets eliminates the need for competitive activities as the actors within markets are considered omniscient. However, until consumers obtain perfect knowledge, the roughly equivalent products can increase their market shares through advertising to produce an increased brand awareness or to inform the public of their superiority and why they deserve larger market shares, and perhaps higher prices, than the competition.
