Competition
Competition
In neoclassical economic theory, the highest state of competition is called perfect competition in which there are a large number of small-sized firms each of which is assumed to be a passive price taker. With perfect information flows and mobility, inter-industrial competition ensures equalized profit rates across all sectors. Finally, intra-industrial competition ensures identical technologies thereby leading to equalized profit rates between firms within each industry. At equilibrium there is full capacity utilization.
Various models of imperfect competition, in which firms are price setters, are seen as the opposite of perfect competition. Under monopolistic competition there are a large number of firms. With free entry and exit, each firm’s downward-sloping demand curve intersects the average total cost to the left of its minimum point on its average total cost curve. At the resultant equilibrium, there is excess capacity with higher-than-minimum cost and price.
Under oligopolistic competition, game theory is used to model strategically competitive behavior among a relatively small number of firms whose market power allows them to erect barriers to entry. Game theory, in which each firm is assumed to have the information to be able to anticipate precisely the actions of rival firms, generates a payoff matrix and devises the most optimal competitive strategy. At equilibrium, each firm maintains excess capacity to deter competition (Dockner et al. 2000, p. 253). As discussed below, this situation is likely to be unsustainable under Keynesian uncertainty when each firm strives to cut costs and prices.
The problem with all the above models is that none includes price- and cost-cutting behavior, an odd failing given the reality of outsourcing to low-wage regions of the world. The remaining part of this essay deals with three different theoretical schools that have rejected the neoclassical theory of competition. We first deal with the classical Marxian perspective (Clifton 1983; Shaikh 1980, 1982; Semmler 1984; Botwinick 1993). The central argument in this literature is that the quantity and size of firms is immaterial with regard to pricing: all firms are aggressive price setters. The pursuit of surplus value leads to increased levels of mechanization. Thus a larger scale of investment forces firms to increase their market shares in order to make such large investments profitable. Price-and cost-cutting constitute the main methods by which each firm “makes room for itself” in the market. Furthermore, this literature rejects the notion that large-sized firms have market power and therefore erect barriers to entry, since in recessions such firms can face barriers to exit. The presence of large amounts of sunk costs makes it difficult for such firms to disinvest, thereby making them subject to potentially heavy losses.
Indeed, it is the presence of varying levels of fixed capital that makes capital mobility across industries a relatively slow process. Quite simply, it takes time to invest and disinvest. Thus profit rates are likely to be different from one another at any given moment. Profit rate equalization happens only as an approximate process over what Karl Marx (1818–1883) called “the cycle of lean and fat years” (Marx 1894, p. 208).
Finally, technological change and fixed capital imply the existence within an industry of different technology vintages, each with its own unit production costs. With roughly equal selling prices, this implies the coexistence of different profit rates. The issue of monopoly power is irrelevant to both intraindustrial and interindustrial competition.
Based on the prewar survey work done by the Oxford Economists’ Research Group (Andrews 1949), Roy Forbes Harrod (1900–1978) radically revised the conventional model of imperfect competition. As in the classical Marxian perspective, price- and cost-cutting are at the core of Harrod’s critique (1952).
Harrod’s critique begins with the standard assumptions of monopolistic competition: price-setting behavior, free entry and exit, and a downward-sloping demand curve faced by each firm. Harrod argues that the standard equilibrium in which there is excess capacity with aboveminimum costs and prices is not sustainable since each firm faces a penalty for not minimizing costs and prices. The threat from potential low-cost rivals in a world of Keynesian uncertainty makes every firm defensively lower its costs and prices in an attempt to safeguard its market share. In the event of excess capacity, each firm will cut back investment, thereby reducing its capacity. In the aggregate, the reduction of investment will also reduce aggregate demand and thus output. With overutilization of capacity, the increase in investment will raise both aggregate capacity and output (demand). In either case, a solution to the knife-edge problem (Shaikh 1989) will ensure that output and capacity are approximately equal to each other around the minimum point of each firm’s cost curve.
Finally, the Austrian school contends that static equilibrium and perfect information preclude the real-world rivalrous competitive behavior that entrepreneurs engage in under capitalism (Kirzner 1997). Austrian authors emphasize the fact that competition actually takes place under conditions of fundamental uncertainty that are not subject to probabilistic calculations. This in turn implies that price and quantity setting by firms may propel the system away from equilibrium for considerable periods, although there could also be tendencies toward equilibration. Competition is, in effect, a dynamic process.
SEE ALSO Competition, Managed; Competition, Perfect
BIBLIOGRAPHY
Andrews, P. W. S. 1949. Manufacturing Business. London: Macmillan.
Botwinick, Howard. 1993. Persistent Inequalities: Wage Disparity Under Capitalist Competition. Princeton, NJ: Princeton University Press.
Clifton, James. 1983. Administered Pricing in the Context of Capitalist Development. Contributions to Political Economy 2: 23–38.
Dockner, Engelbert J., Steffen Jorgensen, Ngo Van Long, and Gerhard Sorger. 2000. Differential Games in Economics and Management Science. Cambridge, U.K.: Cambridge University Press.
Harrod, Roy Forbes. 1952. Economic Essays. New York: Harcourt.
Kirzner, Israel. 1997. Entrepreneurial Discovery and the Competitive Process: An Austrian Approach. Journal of Economic Literature 35 (1): 60–85.
Marx, Karl. [1894] 1967. Capital. Vol. 3. Reprint, New York: International.
Semmler, Willi. 1984. Competition, Monopoly, and Differential Profit Rates: On the Relevance of the Classical and Marxian Theories of Production Prices for Modern Industrial and Corporate Pricing. New York: Columbia University Press.
Shaikh, Anwar M. 1980. Marxian Competition versus Perfect Competition: Further Comments on the So–Called Choice of Technique. Cambridge Journal of Economics 4: 75–83.
Shaikh, Anwar M. 1982. Neo–Ricardian Economics: A Wealth of Algebra, a Poverty of Theory. Review of Radical Political Economics 14 (2): 67–83.
Shaikh Anwar M. 1989. Accumulation, Finance, and Effective Demand in Marx, Keynes, and Kalecki. In Financial Dynamics and Business Cycles: New Perspectives, ed. Willi Semmler, 63–86. Armonk, NY: Sharpe.
Jamee K. Moudud