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Explain why a market for shares may be considered to approximate perfect competition.

Explain why a market for shares may be considered to approximate perfect competition.

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Answer #1

Perfect competition is a market situation where there are large number of buyers and sellers in the concerned product market. The information is freely available in the market and hence consumers are free to make their own choices. Such markets do not have price control.

Share market has the exact features as mentioned above. There are multiple companies that have their shares in the market and any person who wishes to invest can do so with the existing market information. There is not barrier to entry and exit in the share market for companies. All transactions are transparent. Prices in the share market are driven by demand and the performance of the company and the estimated future performance. All external control is absent. This is why the market for shares is an example of perfect competition.

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