Perfect Competition and Competitive Dynamics in Europe; Analysing the Gap Between Theory and Reality

While the construct of market is one of the basic concepts in Economics, the term competition became the elemental paradigm in apprehending the organisation of markets. For economic assessment, it is crucial to understand how markets are organized, how they function, and how firms operating within them behave. Economists remain interested in how different market structures and the concentration of sellers affect market prices and quantities. Long before the advent of neoclassical economics and its equilibrium in a perfectly competitive economy, Adam Smith advocated for competitive markets as the preferred market structure because they lead to socially optimal economic outcomes. This concept essentially encapsulates the entire theoretical background of microeconomics. There are numerous arguments for clarification of the EU competitions rules as some of them are pointed at improving market efficiency for the benefit of consumers while others are driven by purely political and/or competitiveness scrutiny. Hence, the goal of this study is to test perfect competition conditions and therefore the competitive dynamics among European countries, as to analyse the disparity between the theoretical positions and empirical reality. Evaluation is based on testing the equality of prices and marginal cost in the long run, as well as in the short run within a panel structured sample of 38 European countries for the period of 1960-2022. Various estimation methods indicated the absence of the equality between prices and marginal costs across the panel sample and different sub-samples, but with the presence of long term cointegration between these variables, indicating that these variables share a common long run trend.