2. There must be a large number of producers of the product,
each one small relative to the size of the market.
3. Producers must be selling identical or “homogeneous”
versions of the product.The first assumption ensures that no single consumer is large
enough to influence the market price through their buying
actions. This is satisfied in most markets, although there are
important exceptions. For example, Canadian provincial
governments are dominant purchasers of prescription drugs in
Canada, and their market power tends to keep prices below
what they would otherwise be.
The second assumption ensures that no single producer is
large enough to influence the market price through their selling
actions. There are many markets in which this is not true. For
example, DeBeers controls the sale of a large fraction of the
world’s rough diamonds, and thus it can alter the market price
through its sales restrictions. Hydro- Québec is the sole
producer of electricity in the province of Quebec and sets the
price that consumers pay. In contrast, most producers of fruits
and vegetables are very small relative to the size of the market
and have no ability to influence the market price.
The third assumption ensures that there will be a single price in
the market because producers have no ability to differentiate
their product from those of other producers. This condition is
satisfied in many markets for commodities—steel, aluminum,