Perfect Competition and its Application on the Market for College Education

Perfect Competition and its Application on the Market for College Education

The concept that will be explain and appliedin relation to the market forcollege education is perfect competition. The concept is in chapter 6 of the book beginning page 242 to 249.To address the scope of the essay, the paper will first present the characterizations that typify the concept of perfect competitive markets as identified by Schwartz, Carew, & Maksimenko(2010, pp. 242-249),thereafter, it willexplain and apply the concept in relation to the market for college education.

Characterization of Perfect Competitive Markets

Schwartz, Carew, & Maksimenko(2010, p. 242),states that aperfect competitive market is characterized by two assumptions. First, individual firms operating in the industry produce products that are homogenous. That is, the products sold in this market are undifferentiated. Second, the industry is assumed to be fragmented. That is the industry consists of many buyers and sellers, and individual firms are small such that nonehas the ability to influence the market price of a product, and therefore, firms are price-takers.Other authors have characterized perfect competitive market as a market in which consumers have perfect information and knowledge about prevailing marketprices. It is also characterized by freedom of entry and exit whereby any individual firm can enter the industry anytime, and there are no restrictions to exit (Mankiw & Taylor, 2011).Besanko and Braeutigam(2010) add that in perfect competitive markets there is perfect mobility of the factors of production, and there are no selling costs. That is, firms do not spend on advertisement and publicity.

Application and Explanation of the Link Between the Market for College Education and Perfect Competition

One of thefeatures  that characterize perfect competition markets according to Schwartz, Carew, & Maksimenko(2010, pp. 242-243) is that the sellers products are homogenous. That is, they are undifferentiated, and therefore, perfect substitutes for one another. However in pragmatic terms, the market for and product of college education cannot be adjudged to beundifferentiated.On the contrary, the market for college education is differentiated. Potential students perceive the product (college educational)  offered by an individual college in the market to possess certain characteristics that help it appear unique and distinguishable compared with those offered by other colleges.This explains the higher demand for particluar colleges and less demand for others, pointing to a market of college education that is not perfectly competitive. However, it can be reasonedthat it is notnecessarilyaccuratethat certain collegesprovide better college education (differentiated products) relative to other colleges, it could be that the education offered is undifferentiated only that the colleges have established a reputation and offer courses with superficial appeal. If this holds, then to this extent,the market for college education can be viewed as a perfect competitive market.

A perfect competitive market also assumes that buyers and sellers possess perfect information about products and services, including price and characteristics of the product. However, in the market for college education, there is a lot of information asymmetry,and this leads to not achieving Pareto optimum condition. Information asymmetry in the market for college education can be attributed to the presence of the state in the sector, who heavily subsidize the industrybecause ofits social benefits. The state usually stands in on behalf of students to ‘purchase’ higher education, and it may find it difficult to determine the comparativequality of education offered, and thus, may be misled to pay more than is Pareto efficient. Information asymmetry may also occur when colleges make available information about their programs that is deceptive or not in the interest of the public or potential students.The presence of misleading or incorrect information on the quality of academicprograms may leadstudents to expend extra time and fundslooking for information. They may also be tempted to enroll for an highly-priced college education, disregarding a lesscostlybut equally valuable academic program. This informationasymmetries present in the market for college education make the market not be perfectly competitive.

Perfectly competitive markets is also characterized by the assumption that a particular industry, in this case, the market for college education,  is made up of many small buyers and sellers and no individual firm has significant market share to influence price (Schwartz, Carew, & Maksimenko, 2010, p. 242). While to some extent,this characteristic typifies the market for college education., there are some colleges within the market for college education whose price (Tuition fee) elasticity of demand is not perfectly elastic. This implies that they are not entirely price-takers but can influence the price for college education. Somecolleges have a perceptible influence on market price. Whereas they are part of a wider seller groupin which they form just a small section of institutions, they have differentiated the price of their good, and still they attract a market for their goods (college education). This is uncharacteristic of a perfectly competitive market, where individual firm’s have a perfectly elastic demand curve that prevents them from charging a price higher than the industry price. Therefore, based on this characterization of a perfect competitive market, it can be deduced that the market for college education is not perfectly competitive. Not all colleges in the market are price-takers.

Lastly, regarding the explanation that perfectly competitive markets are characterized by freedom of entry and exit, the market for college education is not typified by this assumption. Entry into the market for college education highly regulated, evaluated, and supervised by the government. This is due to the nature of the good being sold and the underlying assumption that firms in such an industry are driven  by the profit maximizing motive by minimizing its costs and operating at a level that suits the firms profit maximization output condition (Schwartz, Carew, & Maksimenko, 2010, p. 244).The market for College education provides a public good with many positives externalities, it also plays a strategic role in the development of a country. Therefore, the government is highly involved in the regulation of the market for college education to ensure that the public is safeguardedto augment the net social benefits of education as well as maintain acceptable levels of social equity. This it achieves by restricting entry and exit from this market. Further, since the market for college education is driven by the goal of profit maximization, a market of college education that is left to the mechanisms of a perfectly competitive market will abstainfrom providing academic programs thatcarry nocommercial or economicappeal.As such, thegovernmentdoes not allow for free entry and exit into the market for college education and thus this market cannot be let to operate on the basis of perfect competition.


It is evident that the market for college education is not exemplified by the characteristics that typify perfectly competitive markets. On the contrary,the market for college education istypified by Monopolistic competition.



Besanko, D., & Braeutigam, R. (2010). Microeconomics. Hoboken, New Jersey: John Wiley & Sons.

Mankiw, G. N., & Taylor, M. P. (2011). Microeconomics. Hampshire, United Kingdom: Cengage Learning.

Schwartz, R. A., Carew, M. G., & Maksimenko, T. (2010). Micro Markets: A Market Structure Approach to Microeconomic Analysis. Hoboken, New Jersey: John Willey & Sons, Inc.

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