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History
of Economic Doctrines Lecture 28 Market Structures: From Perfect to Imperfect
Competition Edwin H.
Chamberlin (1899-1967) Chamberlin’s Harvard Ph.D. dissertation, The Theory of Monopolistic Competition, profoundly altered economic theory, an extremely rare feat for doctoral dissertations. Prior to this work (and that of Joan Robinson, The Economics of Imperfect Competititon) most mainstream economists had largely ignored the vast middle ground between the extremes of pure competition and pure monopoly. They instead focused on refining the theory of pure competition, which assumes many sellers of homogeneous products. The theories of Chamberlin and Robinson combined to underpin numerous studies of industrial markets from the 1940s into the 1960s and they provided the foundations for an expanded approach to industrial organization that emphasized structure-conduct and performance [SCP]. S à Cà
P Paradigm (Structure à Conduct à
Performance) S: how many firms C: pricing, output According to the S-C-P line of reasoning, the structure of an industry (for example, the number of competitors) is assumed to determine conduct (the behavior of the industry’s firms) in a fairly mechanistic fashion and the conduct of these firms yields efficient or inefficient performance from the vantage of the rest of society. Chamberlin believed that firms engage in both price competition and non-price competition Chamberlin thought that advertising and marketing gimmicks were used to differentiate essentially identical products, thereby decreasing the elastically of market demand for a specific brand According to Chamberlin, monopolistically competitive firms cannot realize economic profits in the long run because these markets are characterized by freedom of entry and exit The Structure àConduct—Performance
Approach to Industrial Organization ___*___________________*______________________*__________________________*____ perfect monopolistic oligopoly pure Market Structures
ASIDE: Structure-Conduct-Performance Paradigm From the 1960s into the 1980s advocates of the ‘new industrial organization,’ which relies heavily on elements of game theory, information economics and analyses of strategic behavior to examine decisionmaking by firms and within a firm, increasingly dismissed the S-C-P paradigm. They felt it was unable to provide insight into such important issues as asymmetric information. However, roughly after 1980 the theory of monopolistic competition was reborn as the cornerstone of the new trade theory, which perceives globalization as increasingly causing once-profitable firms with market power to watch their market power being eroded by foreign competitors. Paul Krugman was one of the economists who brought this view into the limelight. Joan Robinson
(1903-1983) Joan Robinson was an avowed radical and Marxist and her writings blended the insights of Keynes, Marx and Neoclassical reasoning in a unique manner. Her work connected capital theory, the theories of value and distribution, macroeconomics and the economics of policy making. She refined the theory of price discrimination, introduced the concept of monopsony power (that is, the ability of powerful buyers to control prices) and separated average revenue (demand) and marginal revenue curves. Robinson’s most noteworthy contributions were, however, in the area of imperfect competition (The Economics of Imperfect Competition, 1933). Robinson defined exploitation of workers as occurring when workers are paid less than the values of their marginal products Robinson put forward most clearly the idea that oligopolies maintain their existence through conscious interdependence Robinson refined an approach to analyzing price discrimination first explored by Arthur Pigou The kinked demand curve model was a theory of oligopoly developed during the 1930’s by Paul Sweezy and expanded upon by Robinson that focused on explaining ‘sticky’ wages and price. Perfect Competition
Efficiency - MSB = MSC = Price (MSB=MSCà EFFICIENCY) -- no profits -- people are paid their worth -- best of all possible worlds * A Common Fallacy: Only Perfect Competition uniquely yields efficiency… The problem: All transactions involve information costs and mobility costs. If transactions (contracting) costs were zero, then economic efficiency vanishes, regardless of market structure, or the nature of the good, or human frailties, or ----- …. --- Monopoly Power - problems with monopolies 1. a lot of dead weight loss 2. profit maximizing quantity for monopolist is far less than the optimal point for society * Dupuit gave a solution: price discrimination * if you assume perfect information and mobility, the inefficiencies of monopolies go away - monopolies lead to problems with income distribution * how do we alleviate this? 1. gov't controls: use revenue for social purposes 2. price discrimination with utilities 3. public utilities, co-ops Stock v. Flow Variables - wealth v. income Chadwick Solution to the Problem Commons had with Utilities : government auctions for licensing to entities that will have monopoly power turns their income from expected profits into wealth for society --patents, copyrights, licensing are gov't methods that support monopolies * Factoid: Most of GDP comes from Monopolistic Competition and Oligopolies Excess Capacity Theory Monopolistic competition E.H. Chamberlin. many
close substitutes so that your monopoly is meaningless =Therefore, no long run profit -- ex: UNC logo T-Shirts, Prof. Byrns econ texts Oligopoly Joan Robinson (a Marxist) Oligopoly -
relatively few producers, so each must consider what
the others will do b/f making their own decisions - -- ex: Cars Wage Discrimination and Exploitation of Labor Paul Sweezy (a Marxist) - kinked demand curves and oligopoly = an explanation for sticky prices - sticky prices - comes out during 1930's b/c prices weren't adjusting during the Depression -- oligopolies had no incentive to adjust b/c it would hurt profits (if they lower prices, others will lower their prices as well; if they raise prices, business will go to competitors) - ironically, a micro foundation for Keynesian economics Cournot and duopoly model sets stage for game theory, which is displacing SàCàP. Digression on Wage Discrimination and Exploitation
of Labor Question: How do you get a raise? Answer: Maximum exploitation Aside: Peter
Principle: you keep getting promoted long enough until you reach the
point of incompetence |
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These web pages are significantly edited and elaborated versions
of student notes based on lectures by Ralph Byrns, 2002-2005.
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