Question

zero market power is the situation in perfect (pure) competition. Due the multitude of firms competing, each has little or no power to affect the price. Thus the closer is an industry to perfect competition, the more likely it is that price dispersion will be minimal.

What do you think happens if one of them decides to drop his/her price lower than the others? What about another one who charges a bit higher than the others?

Answer 1

In perfect competition, in long run equilibrium every firm is producing at It's minimum point on ATC. If a firm lower it's price, it will definitely attract more demand but at the same time will make loss because at the profit maximising output level, it's cost exceeds it's revenue.

But, if a firm charges a bit higher price than the others, demand will decrease because of high price Elasticity of demand. But the supernormal profit earned by the firm will attract other suppliers, which will again cause the price to fall at the firm's minimum point on ATC. Long run equilibrium position is increase or decrease in producers until their combined output sets a Market supply schedule which sets the price at minimum point on ATC for any competitors in the market.