How China’s “Near-Perfect Competition” market changes brand strategies

When I first started to study economics, one of the concepts that caught my imagination was “perfect competition”.

While there are many detailed explanations of what this is, perfect competition is essentially a market with the following characteristics:

1. Many Buyers and Sellers: The market is made up of a huge number of independently acting firms and consumers. Each one is so small relative to the entire market that their individual decisions have zero impact on the overall market price.
2. Identical Products (Homogeneity): Every firm sells a product that is exactly the same as every other firm’s product. There are no brands, no quality differences, and no customer preferences for one seller over another.
3. Perfect Information: All buyers and sellers have complete and immediate knowledge about everything relevant to the market: prices, product quality, and available technology. No one is ever at an informational disadvantage.
4. Free Entry and Exit: It is very easy for a new firm to enter the market if it sees profits being made, and it is just as easy for an existing firm to leave if it’s losing money. There are no significant legal, financial, or technological barriers.

Chinese E-Commerce: The “Near-Perfect” Competition Analogy

While working on brands in China, I’ve often been blown away by the sheer number of competitors in a category, which led me to map the features of perfect competition onto the Chinese e-commerce ecosystem:

Perfect Competition Feature	Manifestation in Chinese E-Commerce
1. Many Buyers & Sellers	Extremely High. Platforms host millions of sellers, and serve hundreds of millions of buyers. The barrier to becoming a seller is incredibly low. No single small-to-medium seller has any meaningful market power.
2. Identical Products	Pseudo-Homogeneity. This is the key nuance. While products are not physically identical (like wheat), the ecosystem creates extreme substitutability. A search for “white t-shirt” or “phone charger” yields thousands of visually identical listings from different sellers. The perception of homogeneity is high.
3. Perfect Information	Asymptotically Close. Consumers have immediate access to price comparisons, detailed product images, 360-degree videos, and, most importantly, a massive volume of user reviews and ratings. Live streaming adds a layer of real-time, demonstrative information. While no one can process it all, the information is available and heavily relied upon.
4. Free Entry & Exit	Remarkably Free. Setting up a store on Taobao, Douyin, or Xiaohongshu is a process of days, not months, with minimal upfront cost. This leads to a constant churn of new entrants and failures, just as the theory predicts.

Because of these conditions, the Chinese e-commerce market exhibits core behaviors of perfect competition although, obviously, it isn’t exactly the same thing.

• Extreme Price Pressure: Sellers are often forced to compete on razor-thin margins. Consumers are highly price-sensitive and will abandon a cart over a few RMB.
• The “Invisible Hand” of the marketplace: The market price isn’t set by a committee but by the aggregate actions of millions, reflected in search rankings and promotional deals. Sellers are largely “price takers” relative to the platform’s prevailing price for a given product category.
• The “Normal Profit” Trap: It is notoriously difficult to make sustained, high profits selling undifferentiated goods on these platforms. The moment a product gains traction, it is immediately copied and undercut by countless other sellers, quickly eroding any temporary advantage—exactly as the theory of free entry predicts.

Marketing in the Crucible of “Near-Perfect” Competition

If the market is so efficient and competitive that it grinds profits to zero, how does any brand survive? 

The Two-Phase Game in China’s “Near-Perfect” Competition

Chinese e-commerce platforms like Taobao, Douyin, and Pinduoduo create a market that behaves with the ferocious efficiency of “near-perfect competition.” This environment, characterized by millions of sellers, extreme product substitutability, and perfect price information, grinds down margins and makes long-term profit seemingly impossible.

The logical conclusion was that marketing must be used to build a brand—an emotional moat—to escape this commoditization trap.

However, this misses a critical, on-the-ground reality: in China, you often must first win within the system of perfect competition before you can build a fortress to escape it. The successful playbook is not just “build a brand,” but a deliberate two-phase strategy:

Phase 1: Hack the Algorithm to Achieve Volume (The “Business” Phase)

Before a brand can have a soul, it must have a pulse. This initial phase is about survival and traction by leveraging the very rules of the hyper-competitive platform.

• Focus on a Single, Razor-Sharp Attribute: Instead of a complex brand story, you focus on one undeniable, searchable value proposition. This is the antidote to homogeneity.
  • Examples: “The phone charger with the fastest charging time,” “The wool coat with the highest wool percentage,” “The toddler sippy cup that is 100% leak-proof.”
• Master Algorithmic Marketing: This is a science. You use data from tools like Alimama (Taobao’s advertising platform) to identify high-volume, low-competition keywords. You optimize your listings (title, images, descriptions) for maximum Click-Through Rate (CTR) and conversion. The goal is to win the “invisible hand” of the algorithm, earning you precious organic visibility.
• Leverage Initial Price and Value: Often, this involves an initial price point that is aggressively competitive to trigger the platform’s “value” algorithms and attract the first wave of price-sensitive customers. The goal isn’t profit here; it’s social proof.
• The Goal of Phase 1: Generate volume. Generate sales. Generate reviews. This data and activity signal to the platform that your product is desirable, which in turn feeds you more traffic, creating a virtuous cycle. You are building a business based on a functional benefit.

Phase 2: Pivot to Building the Emotional Moat (The “Brand” Phase)

Once you have a steady stream of customers and positive reviews, you have a foundation. Now, you can begin the work of making those customers loyal and less price-sensitive.

• Activate Your Customer Base: You now have a list of people who have had a positive experience with your product. You engage them. You move them from the transactional platform (e.g., Taobao) to a more private and loyal community (e.g., a WeChat group).
• Layer on the Story: Now you tell them why your fast-charging cable is better. “It’s made with sustainably sourced materials.” “It was designed by ex-Apple engineers who left to pursue their passion.” “It’s the official cable of a popular esports team.” The functional benefit (fast charging) is now wrapped in an emotional one (sustainability, innovation, community).
• Expand the Content Universe: You use Xiaohongshu to show the lifestyle your product enables. You use Douyin to run live streams that are less about a hard sell and more about building a relationship with your founder or community manager. The product becomes a character in a larger story.

This sequential approach is crucial because trying to build an emotional brand from day one is often too expensive and inefficient when you have no social proof or volume to validate your claim.

Example

Perfect Diary (完美日记) is a well-known case study.

• Phase 1 (Volume): They exploded by partnering with an immense number of mid- and micro-influencers (KOCs) on Xiaohongshu, focusing on specific, functional attributes like “long-wear lipstick” and “pigmented eyeshadow palettes.” They used data to identify trending colors and released new products at a blistering pace, hacking the content and discovery algorithms to drive massive volume.
• Phase 2 (Brand): After achieving scale, they opened immersive, Instagram-friendly offline stores, collaborated with high-profile entities like the Metropolitan Museum of Art, launched and acquired higher-end sub-brands to build a more sophisticated brand identity and foster loyalty.

One of Perfect Diary’s pivotal acquisitions is a brand called Little Ondine – which was a Searchlight client at the time. We helped them rationalize their offline retail strategy by focusing more on visibility than sales, refocused the brand on a more affluent and receptive target audience and guided their ecommerce execution to drive better response rates and volume. We also supported them with guerilla marketing – getting them significant visibility in the London Fashion Week and Shanghai Fashion Week for almost no spend. Little Ondine caught the attention of Perfect Diary and the founders and shareholders exited via a sale to Perfect Diary before they went public.

Sunner Chicken (圣农) is another of our clients who has navigated this journey well. From being a B2B supplier of chicken and other processed meats to leading restaurant chains and fast-food brands, they decided to launch a B2C offering in 2021. As a company, at that time they had very little experience and resource in consumer facing businesses. Even their sales team had no idea how to negotiate activations and visibility with offline distribution channels, leading to situations where we’d go on market visits and find their brands hiding in a freezer until a consumer asked sales staff to go find it for them.

Luckily, and surprisingly, online shopping dominates even the food category, at least in the top 20 cities in China, so we were able to get the client to focus on building an online business first. They did that through the first year while we helped to refine their brand positioning, product mix and targeting and once they had enough of a consumer base, they started to focus on brand building advertising (as opposed to just performance advertising) and rapidly achieved the number one position even on crowded ecommerce marketplaces like TMall, Taobao and Douyin which all had over 1,500 brands of frozen chicken competing for a share of the consumers’ freezer space.

Conclusion

The near “Perfect Competition” of China’s ecommerce marketplace makes it a lot harder for brands to win than other markets, where offline still dominates, not all brands have equal access to consumers, and consumers do not have access to extensive information about a large number of available brands. In this environment, success involves first building a presence, then leveraging that to build a brand in the long term. Done right, brands can rise above the internecine battlefield of the open market and start to build a moat that drives repeat buying, brand premiums and long term success.

At Searchlight Consulting, we help brands grow and cement their success in the marketplace with clear business and marketing strategies supported by deep insights on the consumer and dynamics of the marketplace. Write to us on enquiries@searchlightchina.com if you’d like to talk to us about your business.