Imperfect Competition

 

I don’t know much math, so I have to think.

Joan ROBINSON

(1903-1983)

Joan Robinson, an iconoclastic British economist, was a combatant in virtually every major controversy in economic theory and policy between 1930 and 1983. An avowed radical and Marxist, her writings blended the insights of Keynes, Marx, and neoclassical reasoning in a manner uniquely her own. However, her foes joined her friends in admiring the innovative quality of her ideas and research. She married E. A. G. Robinson (another distinguished British economist) after completing her formal studies in economics, and was in the inner circle of Cambridge University economists who aided John Maynard Keynes in launching the Keynesian Revolution.

Robinson's work bridged capital theory, the theories of value and distribution, macroeconomics, and the economics of policy making. Among her many other analytical contributions to economic theory, 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, however, were in the area of imperfect competition. In 1933, at almost exactly the same time that she launched The Economics of Imperfect Competition, from Cambridge, England, Edwin Hastings Chamberlin issued a parallel and complementary theory from Cambridge, Massachusetts with his theory of monopolistic competition.

Prior to Robinson and Chamberlin, economists (with the rare exception of Cournot and very few others) had ignored the vast middle ground between the polar extremes of pure competition and pure monopoly. Although Robinson's “imperfect competition,” stresses oligopolistic interdependence and views competition and monopoly as mutually exclusive, while Chamberlin identified modern business as a blending of the two, these differences are more superficial that substantive. Their analyses sparked a school of thought called the Structure-Conduct-Performance (SCP) approach. According to the S-C-P line of reasoning, the structure of an industry (e.g., 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.

The Structureà Conduct à Performance Paradigm

In recent decades, however, advocates of the “new industrial organization” [new IO] increasingly dismiss the S-C-P paradigm as unable to provide much insight into such important issues as asymmetric information. which relies heavily on elements of game theory, information economics, and analyses of strategic behavior to examine decisions both internal to a firm and interdependently among by firms, For example, corporate managers are now assumed to maximize their personal self interest, which at times may conflict with the maximization of corporate profit assumed per standard S-C-P standard doctrine. The principal-agent problem that emerges from asymmetric information permits such fiascos as the implosions of Enron, Worldcom, and Tyco, in which stockholders were bilked by corporate CEOs in the early 2000s. Nevertheless, Robinson’s analytical feats continue to provide useful insights into myriad market situations. In Robinson's phrase, she and Chamberlin introduced a “box of tools” sharper and more generally applicable than those that preceded their works.

 

Author: Ralph Byrns

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