Institutional Forms of Competition

The idea that the function of politics and the judiciary consists of altering the insti­tutional structures of society so as to induce self-interested individuals to behave in a way conducive to the public good is a decidedly Benthamite notion. There is a cer­tain "despotic" flavor to this view because the practice of Benthamite politics is fa­cilitated best by concentrating the ownership and control of property rights in the hands of a central authority.8 Chadwick almost seemed to view centralized control as a prerequisite for eliminating waste, and he was so committed to this principle that he reformulated the notion of competition to accommodate it to the exigencies of central authority.

After thirty years of investigating, designing, and reformulating a myriad of pub­lic policies, Chadwick consolidated his views on the proper mode of government in­terventions and presented them in a "position paper" to the Royal Statistical Soci­ety. Citing the coexistence of "sound and unsound" principles of competition, Chadwick contrasted the orthodox view (which assumed large-numbers rivalry among firms in a share-the-market context) with his "new" concept of competition that assumed rivalry among several bidders to win an exclusive right to serve the en­tire market. Chadwick labeled the former notion "competition within the field" and the latter "competition for the field." Describing his sustained support for the latter principle, Chadwick declared:

Chadwick had an early notion of "public goods"—those that provide benefits ex­ternal to the immediate user—and it is to the production of these goods that he sought most vigorously to apply the principle of competition within the field. The attempt to implement or enforce a competitive system based on decentralized prop­erty rights was judged wasteful by Chadwick, so he proposed an alternative system. Government, representing society, would buy out competing suppliers and let out contracts, through a bidding process, for the exclusive right to supply the public good. Chadwick termed this principle "contract management."

In more modern dress, the Chadwick principle can be explained in terms of Fig­ure 1. The negatively sloped cost curves are those of a public utility, transporta­tion firm, or natural monopoly. The profit-maximizing monopolist would produce a quantity Qp and sell it at price P . Chadwick's point is that given certain conditions and alternative property rights assignment, the existence of natural monopoly need not imply monopoly price and profits. Specifically, given that an elastic supply of competitive bidders exists and that the costs of bidder collusion are high enough, the government could purchase the small number of competing firms and let out for bid the exclusive right to supply the good or service in question.
A number of institutional and contractual arrangements are possible in this con­text. The government may or may not provide fixed plant and capital equipment. The contract period may be of fixed duration, or it may be reopened at the discretion of the government.
Figure 1

Certainty and/or perfect information may or may not be assumed on the part of all or some parties. For example, treatment of windfall gains and losses may be made part of the model. Solutions will, of course, vary according to the na­ture of the assumptions made.

Some possible solutions may be shown with the aid of Figure 1. Let us assume that certainty and perfect information exist on the part of the government and the bidders and that the government supplies the fixed capital. The problem, then, is to investigate how the nature of the contract specifications alters the solution. Clearly, if the maximum bid is made by suppliers to the government in the absence of price and/or quantity contract specifications, the solution remains unaltered, except for a transfer of welfare from the monopolist to society. Such a transfer is depicted in Fig­ure 1 by the amount GPpBF. It would in effect raise the average cost to the suc­cessful supplier to AC, resulting in a Chamberlinian "tangency solution" (sec Chap­ter 17) between AC and the demand curve at price Pp .

The more usual case—the one that Chadwick featured in the example of rail­roads—is the situation in which the government contractually specifies some mini­mum quantity (and/or quality) to be offered and lets potential suppliers engage in a bidding process. If it is assumed that the government contractually specifies some quantity Qa to be supplied, bidding will proceed to price Pa, at which only normal profits are being earned. The important point is that Chadwick's principle makes the attainment of a "competitive" solution (where average revenue equals average cost and economic profit is zero) a possibility through public ownership and private op­eration. All this implies that the competitive bidding process, given altered property rights assignment, might approximate at least some of the results of the orthodox model of competition, where competition is defined as a market structure of many rival, independent firms. Whether or not this is a practical result depends on numerous institutional forces, including the mode of consolidation, design of contracts, cost of acquiring information, and so on.