Limited Competition Theory

The Development of Limited Competition Theory

So it was that, soon after Marshall's passing, there appeared a tendency to move out of the symmetrical house of theory which he constructed. The movement showed two distinct influences.

On the one hand, a pupil, Piero Sraffa, in 1926 published "The Laws of Returns under Competitive Conditions." Starting from a criticism of Marshall's theory, particularly the normal supply curve, Sraffa departed from the assumptions of compe­tition, and moved to the assumption of monopoly as a base. He argued that diminishing unit costs make for instability and tend toward monopoly. He adopted the negatively-inclined price-determined demand curve (sales) for a single seller, and argued that the position of such a seller is in kind, if not in degree, that of a monopolist.

In 1930, in a symposium discussion in the Economic Journal, a number of leading economists reached substantial agreement that, unless all competitors are proportionately affected, di­minishing unit costs will disturb equilibrium. It was also agreed that when imperfect competition exists in an industry, it is impossible to assume a tendency to the optimum output.

It may be doubted that the new theories would have attracted the attention they did had there not come the great Depression of 1931-1936, and the widespread revulsion of feeling toward almost everything pertaining to the theories and practices of the days before 1929. As part of this change, the attitude of economists toward competition tended to change. And the event of the N.R.A. in 1933 marked an upheaval which sharply called attention to problems of competition and pricing in the United States, and brought a good many economists for the first time face to face with them as they actually are.

Particularly to be noted, is the way the rise of Institutional Economics added to the interest in "monopolistic competition," naturally mostly in America. Institutionalism, while it is fundamentally opposed to such doctrines as static equilibrium based on rational choice, helped clear the way for the new doctrine by attacking all theory based on a competitive price system, and joined in emphasizing the institutional limitations of the economy. Both Institutionalism and limited-competition theory stress the business combination, collusive trade practices, product differentiation, and other conditions restricting compe­tition.

At about this time, or a little later, articles by Hotelling, Shove, and Kahn appeared. Finally, in 1933, came Mrs. Rob­inson's Theory of Imperfect Competition. This work seems to have been stimulated by the foregoing discussions and to have been an attempt to do what Sraffa had asked for: "to abandon the path of free competition and turn in the opposite direction, namely towards monopoly."

On the other hand, Chamberlin's contribution developed quite independently of these discussions of the compatibility of increasing returns with "competitive equilibrium." Although not fully published until 1933, it was conceived prior to 1927, when it was submitted as a doctor's thesis at Harvard. Cham­berlin's thought, which is concerned directly with the problem of effecting a synthesis between the traditional theories of monopoly price and of competitive price, seems to have origi­nated in a dissatisfaction with the two theoretical extremes as being out of accord with economic reality. He sought to in­tegrate them into a single structure. One chapter of his work was published in 1929, and the complete study in 1933.

The Scandinavian economist, Zeuthen, and the German, von Stackelberg, also made independent contributions.
Thus a market-value theory not based on perfect competition was established.

General Characteristics of Limited Competition Theory

The general characteristics of limited-competition theory may be stated in outline form as follows:

It concerns static equilibrium. (Incidentally it does not touch cycle theory.)
It does not concern itself with time, time differences, or "lags."

It is highly abstract. For example, in addition to the pre­ceding points, it assumes rational individual action.
It is pure "price economics," treating demand and supply as price-determined quantities of goods. Rational calculation of pecuniary gains is assumed. The chief criterion of competition is found in elasticity of price-determined sales or revenue curves.

Its analysis is highly individualistic in the sense that it assumes self-interest motivation working in and for single firms. Little progress has been made toward generalizing it.

It sets up a negative criterion of competition as something "pure" or "perfect" in the sense of being free from impurities or imperfections. Competition is mere competition only when the competitors have no capacity to influence the price of the good they sell, and are not "handicapped" by inequalities in ability or in location. Though the point is not so fully de­veloped, it is also held that buyers must be sufficiently numerous and equal to prevent differences in quantities bought or in other advantages from affecting full elasticity of supply for each

Thus one may say that the general idea is that each individual seller (or buyer) actually has a direct influence on price, and that this is an imperfection in competition, or a monopoly element, which, it is held, limits competition and largely invali­dates theory based upon the assumption of competition.

The idea of monopoly, and therefore of competition, pertains to particular concrete products, not to the general abstract utility which they afford to the consumer. Thus some monopoly exists, and competition is imperfect, as long as products are identifiable, not identical. Monopoly is limited by any degree of substitution of one good for another, but such substitution does not make "competition" unless the goods are practically identical. Any power to affect the price of a concrete product (say a brand of automobile) is monopoly or imperfect competi­tion, regardless of whether consumers get their money's worth in the, way of abstract utility (say motor transport service). Then the theory pertains to influences affecting existing prices, rather than to the causation or determination of values in which marginal utility plays a vital part.

It is emphasized that in actual markets sellers have some control over the output and price of their particular concrete products, that actual competition is influenced by conditions other than prices, and that therefore the demand for a given product of a given firm does not hold up indefinitely as it in­creases its output — is not infinitely elastic.

The general assumption is that each seller (and buyer) is rational and seeks to maximize his own gains by equalizing his marginal revenue and his marginal expense. Thus the motiva­tion of actual competitors is held to be essentially similar to that of a monopolist. The motivation of the monopolist is assumed to be the same as that of the competitor, in the sense that both tend to maximize their profits.

Here comes a good deal of refinement in definition and in the "technique" of deductive reasoning on the basis of the assump­tions made.

All begin with a single firm, and most of the discussion con­cerns the equilibrium of the firm, though Chamberlin makes some progress toward bringing his theory into accord with the "diversity of conditions" affecting different producers in real life. The theory is not really generalized; though a good deal has been said about an assumption of "symmetry," or uni­formity, on which basis one might apply the theory to an industry.
For the single firm at a given time, enterprise can hardly be treated as are the other factors of production, and in comparison with a social point of view based on competitive analysis, the enterprise factor is left in an unsatisfactory position functionally. Profits are treated as cost only as an assumed minimum "charge." The problem of uncertainty and discount differences is hardly touched.

Much attention is given to the curves of revenue or sales per unit of product, and of expenses per unit of product, both for the single firm. Beginning with varying amounts of revenue and expense, resulting immediately from different prices, the limited-competition theorists derive from them curves of the marginal revenue and of marginal expense, which merely show the addi­tion to total revenue or expense made by adding additional units of product to the business of the firm.

Under given conditions of average revenue and expense, equi­librium for a firm tends to be such that average revenue is equal to or above average cost (including profit in cost), and marginal revenue equals marginal expense.

The general tendency is to treat selling costs, such as advertis­ing, as being inconsistent with perfect or pure competition based on price alone. Such expenditures are treated as evidences of impure or imperfect competition — as evidences of difference among competitors or imperfections.
Differential returns, or rents, appear to be treated as incom­patible with competition.

It is denied that competition furnishes a workable ideal of social welfare. Wastes or exploitation are results of competition. The result is that more government regulation or control is seen as desirable than is seen by an economist who thinks that com­petition can insure a tendency to maximize production