Perfect competition is a market structure that establishes an ideal equilibrium between demand and supply. Sellers do not have many entry barriers, and rivals only compete in prices. A few characteristic features of the given environment result in the fact that a perfectly competitive firm can generate profits in the short run but not in the long run.
The short-term benefits are possible because a company can easily enter a market that is full of buyers. Any harsh competition is absent because customers make buying decisions based on products’ prices and not their qualities. Under such conditions, a particular part of customers will keep paying for a product or service.
However, long-term profits are impossible because sellers cannot add value to their products or services to increase sales. In perfectly competitive markets, all the goods should be identical, meaning that modifications will break the system. Consequently, sellers bear increasing costs, but their revenues remain the same. There also exists an opportunity that a new seller will enter the market and reach the firm’s customer base.
This information demonstrates that a perfectly competitive firm cannot reckon on profit generation in the long run. The selected market structure implies that this organization should keep providing customers with the same product or service all the time. Thus, the inability to add value denotes that the firm cannot attract more buyers and maximize its profits in the future.