Monopolistic and Imperfect Competition

Monopolistic Competition and Imperfect Competition Definition

Early Assumptions Concerning Competition

From Adam Smith's day, most of the leading non-Socialist economists assumed a condition of competition in which monopoly was exceptional, and in which other limitations were not sufficient to prevent markets from generally representing voluntary indi­vidual choices. Few if any of the economists of the first half of the nineteenth century, however, assumed perfect competition. Mostly, though little concerned about precision in the matter, they recognized that various frictions and clashes of interest exist, which would make competition imperfect.

Mostly, too, they were concerned with "the long run" tend­ency toward a condition not immediately or precisely attained. They assumed sensible men, actuated by self-interest — by a "propensity to truck," or by desires, the latter often confused with pleasure calculations. These assumptions underlay their "law of supply and demand."

Often, not always, the tendency was to consider competition as a "good" condition, on the ground that it tends to maximize the production of those goods which individuals desire and find it worthwhile to make. They were not concerned with any hypothesis of "optimum output" for an individual or firm, but with abundance for society or nation. And they distinguished between production in terms of goods ("value in use") and production in terms of exchange values — between well-being and wealth.

All this "ideology," of course, involves difficult assumptions as to the nature of man, of society, and of the environment. A few stated their premises; many did not. But criticism piled up from early Socialists, Institutionalists, and Historicists who attacked them. Always, the goodness or desirability of compe­tition was under fire, the criticism in early days being directed against customs and institutions which prevented equality, whether of wealth or opportunity. And as the attacks continued, economic theory was somewhat refined, notably by Mill and Cairnes. Different "cases" of value determination were dis­tinguished. The problem of what constitutes a "natural" equilibrium, and the problem of the definiteness with which a "natural value" can be determined became more and more evident.

For one thing, the growth of business organization and volun­tary associations brought more collective or group activity and bargaining — trade associations, cartels, labor unions, corpora­tions, and the like.

And as the market and pricing mechanisms grew more com­plex, the difficulty of relying on the older concepts of barter, or the newer concept of utility, increased. To this effect, the growing use of bank credit contributed mightily. Accordingly, the strain of "price economics," always apparent in Classical thought, came out as the difficulties of "real" value economics grew.

Thus the market place seemed to give little satisfaction in definitely determining prices, or in assuring that the maximum productivity would be attained. And the law of supply and demand seemed to have come to mean no more than that quan­tities bought and sold are adjusted to prices.

Some economists tended to make their system of thought more abstract, consciously eliminating the imperfection of actual competition. Others tended to reject abstraction, and to resort to description of cases and induction. A certain French mathe­matician took the former course, but chose to treat monopoly as the one limit to competition — as the negative or reciprocal of competition. Under the circumstances, this seed took root and eventually bore fruit in the theory of imperfect or "mo­nopolistic competition."