My book states that one factor defining a perfectly competitive market is its participants having full information about prices and product characteristics. I can understand how having perfect information about prices promotes price taking behaviour (you can't charge me a higher price for your product if I know I can buy it cheaper from other producers). However, why exactly is having full information about product characteristics important for characterizing perfect competition? Thanks in advance.
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2 Answers
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Perfect information implies every buyer and every seller knows everything in the market. As soon as a firm brings a new product to the market, other firms start selling the same, identical, product. In practice, say a kebab shop comes up with a secret new ingredient and attracts more custoemrs, but as soon as this happens, other shops copy it. Bottomline: any information-advantage is short-lived in perfect competition. This also leads to the other characterisation, all products are homogeneous.
If the firms/customers do not possess full information about the market/products, then you should characterise the market differently i.e. oligopoly, monopolistic competition or monopoly.
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However, why exactly is having full information about product characteristics important for characterizing perfect competition?
Because in this situation even in extreme case you can be sure, that MC=MB. For example, let's assume that 1 util=1 dollar. There is a pizza with price of 100 dollars and I agree to pay only 100 dollars as maximum (not even 1 cent more), because I expect to derrive 100 utils from its comsumptions. If my estimate of its utility is even slightly off, then I can be worse off by buing it. For example, if it turned out that its consumptions gives me only 99 utils of satisfaction.
