Perfect competition theory is based on very unrealistic assumptions. Evaluate whether such a theory is useful in explaining the behaviour of real world firms.

The main assumptions of the model of perfect competition are: the number of selling firms tends to infinite, both sellers and buyers are price takers (i.e. they cannot influence the market price), identical products are sold by each firm, there are no barriers to entry or exit, all agents have perfect information and there are no transaction costs or externalities.Each of these assumptions can be criticised for being unrealistic: there is always a finite number of firms in any market, some firms may have market power to influence the price in their favour, products are differentiated, there frequently are barriers to entry or exit (such as required investments in machines) as well as asymmetric information and externalities.Nevertheless, the model may still be useful to explain and (up to a point) predict the behaviour of some firms. It sets a benchmark of efficiency that can be compared to real conditions by evaluating levels of competition. Moreover, the model rather well approximates commodity markets (such as coffee) and those whose product cycle has reached maturity. Some competitive products are highly similar (e.g. Android smartphones). "Essentially, all models are wrong, but some are useful" (G.E.P. Box 1987).