Homogeneous Product

Homogenous products refer to the items that are perfect substitutes where the buyer finds no real difference between the products offered by different organizations.

Price remains to be the single most important dimension.

In such a scenario, the existence of such products facilitates collusion, at the same time as heterogeneous products completely different from each other, cannot be easily substituted. 

Product differentiation

In the homogenous goods market, price competition leads to a perfectly competitive outcome, even with two firms.

If there are a large number of participating entities - free entry and exit and relatively homogenous product, it can be designed in the manner as perfectly competitive (PC). 

The assumptions related to the perfect competition are 

• All firms produce homogenous goods and consumers view it as identical.

• All buyers and sellers have perfect information related to the price and quality of the manufactured goods.

• Buyers and sellers cannot influence the price at which the item is purchased or sold, which means, the buyers and sellers are price takers.

• There are no transaction costs of participating in the market.

• Each business unit bears the full cost of the production process and there are no externalities that one can impose on others. 

• One has the freedom to “entry and exit” any industry without a special expense. 

• There exists perfect divisibility of the output. 

The key condition for a competitive market is price taking where every firm and every consumer must take the market price of the good as provided and there are no one one-sided rules that can affect the price by their choice on how to buy or sell. 

Market supply curve

A curve shows how many units can together produce at each price.

It shows the quantity one may have to produce at each price to derive the supply curve.

If the market’s supply curve is the combination of the data from all the individual units, then an increase in the number of competitors will reduce profit for each. In the case of loss, each will have a smaller share of loss. 

In general in such models, the profits may be short term and not long term profits and it is not economic but accounting profits.

PC & Social welfare 

A PC model leads to maximum social welfare as the cost of producing is equal to its social value.

Economists favor such markets because it maximizes welfare for a given initial allocation of resources and wealth.  

Further, the theory states income distribution is supported by a competitive equilibrium plus the system of income transfers. 

Examples of such situations are publicly owned land gazed by sheep farmers where each producer considers their profit and does not consider overgrazing as a problem, rather everyone would probably be better off with restrictions on the use of such fields but producer dislike restrictions on the gazing rights.

Similarly, the cost of oil per barrel is determined at one platform to regulate profits.