Criticism of Limited Competition Theory

Criticism and Limitations of Limited-Competition Theory

Among the foregoing questions involving differences of opinion among those who reject competition as the basis of economic theory, may doubtless be found the grounds for the more impor­tant shortcomings of monopolistic or imperfect-competition theory.

Some of their critics have stressed the limitation that arises from eliminating time from consideration, as Chamberlin and Robinson admittedly do. The importance of expectations of the future is emphasized by some who accept the monopolistic-com­petition approach, but they seem unable to fit this element into the theory. They either assume a degree of certainty in con­nection with discounting future revenue, or fall back upon an assumed probability of distribution among expected returns {which abstracts from different degrees of certainty).

Others have considered as an important shortcoming the omission of qualitative differences and sociological motives. A good many non-rational conditions affecting the motivation of buyers and sellers, particularly enterprisers, are excluded by most English-speaking limited-competition theorists. Here, too, should be mentioned the criticism that a monopolist, if he be rational, cannot have the same idea as to what constitutes his maximum profit as does the competitor. Both seek to make all the money they can; but, even if the conditions of demand and cost are the same, they must know that this maximum differs under the limitations imposed by competition. Thus the assump­tion of identical motivation is unreal.

Still others, noting the essentially mathematical approach, have pointed to the limitation that arises when sweeping assump­tions are made about "other things remaining equal."

The difficulty of generalizing from such theory and deriving a theory of distribution, shows its weakness.
Unquestionably, there has been some tendency to exaggerate the novelty and importance of parts of the theory under discus­sion here. It is generally conceded that the "marginal revenue curve" (so much emphasized by some) has no fundamental importance. The author would add that in the theory of rail­way rates there had long been a theory of monopolistic competi­tion covering cases of duopoly and oligopoly which seems to have been ignored by Chamberlin and Robinson.

It seems fair to add three points, all of which follow from the fact that monopolistic competition theory is "price economics," and takes the Marshallian entrepreneur point of view:

(1) Competition is thought of as conditioned by price, instead of as a condition for the determination of price. That demand and supply may be regarded as primary schedules, preceding price determination, is hardly recognized.

(2) The enterpriser is virtually left out of the competition picture, and profits are treated as residual and tending to dis­appear under competition. (In this connection, the debates as to whether enterprise is a "divisible" factor are illuminating.)

(3) The tendency, most notable in Chamberlin's thought, to treat any difference in product, location, or selling expense as the basis of a monopoly advantage takes one back to Senior who also argued that monopoly stands opposed to "equal com­petition," and that difference in location gives monopoly power. As observed in discussing the early economist, to define mo­nopoly as absence of equal competition would make "monopoly" the rule, and would make it a price-determined condition, as are all differentials or rents.