Evolution of Competition: From Competitive to Cooperative Competition

Author: Wang Tao
Publisher:
Publish Date: 2002-02-01
Features: Since every enterprise is subject to the laws of the market, it must maintain the same level of efficiency as the average enterprise in the industry. Otherwise, losses caused by inefficiency and high unit costs will eventually force the enterprise out of operation. The long-term adjustment process of equilibrium compels all enterprises to attempt production at the lowest possible long-run average cost. In perfect competition, firms are "price takers" and "quantity adjusters." An individual firm cannot manipulate the prevailing market price; its only independent judgment is how much to produce at the current market price. The output of a specific firm and the industry's production capacity are both responses to changes in demand. If market demand increases relative to the industry's supply capacity, the market price rises, attracting entry and expansion, which over time increases production capacity. Conversely, if market demand decreases or the industry overexpands, the market price falls, expansion is hindered, and firms or the industry reduce production capacity. For identical products, the focus of competition is on price, and firms must have the ability to compete with lower market prices. In perfect competition, prices are very easy to fall. Whenever the quantity supplied exceeds the quantity demanded, efficiency improves, or technology advances, prices will fall, meaning that firms will only be allowed to earn attractive profits at lower market prices. Perfect competition provides the greatest protection for consumers from exploitation by firms, as consumers can freely make purchasing decisions without being influenced by others. In short, perfect competition is a microcosm of a free market. The perfect competition model adopts an overly narrow view of the competitive process because, in a sense, all attention is focused on price, while product competition (as all firms' products are assumed to be identical), technological competition (as all firms are forced to adopt the most efficient production technology), or marketing competition (as the products are homogeneous) are ignored. In fact, perfect competition is only "effective" and "sustainable" as a form of competition based on price competition.
(II) Theory of Imperfect Competition
The theory of imperfect competition or monopolistic competition refers to the competitive theories proposed by British economists Robinson and Chamberlin in the 1930s. Like the theory of perfect competition, the theory of imperfect competition also exists within their respective price theories. However, unlike the theory of perfect competition, they believed that real-world competition is not perfect competition but monopolistic competition or imperfect competition. Therefore, the theory of imperfect competition shifts the focus of research to how prices are determined, how firms behave, and how equilibrium is achieved under real-world monopolistic competition or imperfect competition. Thus, compared to the theory of perfect competition, the theory of imperfect competition is closer to the actual competitive market process.
Although there are multiple explanations for the origins of imperfect competition (or monopolistic competition), the criticism of Marshall by Sraffa is generally regarded as the starting point. In 1926, Sraffa's famous article "The Laws of Returns under Competitive Conditions" made two sharp criticisms of the dominant theory of perfect competition at the time: First, perfect competition is incompatible with economies of scale. If economies of scale can improve returns to scale and thereby reduce costs, then the goal of maximizing welfare would require the establishment of large enterprises, which contradicts the conditions required by perfect competition. Since large enterprises are not subjected to the same level of competition as numerous small enterprises, there is a risk that they may either fail to realize their cost advantages or realize them without benefiting consumers. The result is either that the goal of maximizing welfare cannot be achieved, or that the goal of fair distribution under perfect competition cannot be met due to excessively high profits earned by large enterprises. Additionally, the reduction in the number of enterprises creates barriers to market entry, undermining the principles of equal competition opportunities and free market entry. Here, Sraffa first introduced the important "dilemma" proposition in the development of competitive theory.
Second, the overall market is actually composed of several local markets, in which a few firms may form a monopoly. Perfect competition theory does not account for this phenomenon. The relative monopoly Sraffa refers to in these local markets is not the same as the monopoly that stands in opposition to perfect competition but rather represents an intermediate state between the two. The of these firms lies in the fact that they are not true monopolies but rather occupy a special market. Sraffa had already noticed that there is an intermediate state between perfect competition and monopoly. He reminded people: "If we want to equip ourselves with theories of monopoly and competition, the two extreme states, and use them as analytical tools to study the actual conditions of different economic sectors, we must be cautious, because in general, these actual conditions do not fully correspond to either category but are widely distributed in the middle region."① However, Sraffa did not explicitly propose a theoretical category to encompass this situation. After him, the debate surrounding these issues became very intense. In 1933, Robinson and Chamberlin published "The Economics of Imperfect Competition" and "Theories of Monopolistic Competition," respectively, and theoretically summarized and analyzed the intermediate state between perfect competition and monopoly as imperfect competition or monopolistic competition.
Robinson concluded that imperfect competition exists based on consumer preferences and the substitutability of products. She believed that all consumer goods are within the purchasing power of consumers, and in this sense, products form a chain of substitutes. Under the condition that substitution is more likely within a group of products than between two groups, the substitution chain will break due to the existence of substitution gaps. Therefore, due to consumer preferences, market imperfections arise, making each firm a monopolist of its own output. If numerous firms could sell their products in a perfect market (one without consumer preferences), this would be perfect competition (or pure competition). However, due to the presence of numerous market imperfections, this state of perfect competition is unattainable, and imperfect competition (or impure competition) is the norm.
Chamberlin, on the other hand, primarily concluded monopolistic competition based on product differentiation. He argued that in the real market, most products are produced by numerous firms, resulting in intense competition. However, due to product differentiation, each firm becomes a monopolist within its local market, and the greater the product differentiation, the higher the degree of monopoly. This state, which combines both competitive and monopolistic elements, is called monopolistic competition. In Chamberlin's view, perfect competition and perfect monopoly are both extreme states, while the monopolistic competition between them is the norm in most markets. In such a monopolistic competition market, firms engage not only in price competition but also in non-price competition such as product quality and advertising. Compared to perfect competition, monopolistic competition is closer to the actual competitive market process. However, Chamberlin still believed that monopolistic competition markets are less efficient than perfect competition markets because the equilibrium point in monopolistic competition is higher than that in perfect competition, resulting in higher prices and lower output.
If we regard the theory of perfect competition as the foundation of competitive theory, the theory of imperfect competition or monopolistic competition undoubtedly represents an extension of the theory of perfect competition. However, this development is very limited, and overall, it has not completely broken free from the dogmas and constraints of the theory of perfect competition. Although the theory of imperfect competition or monopolistic competition treats the real-world competitive market state between perfect competition and monopoly as a norm and analyzes the determination of prices and equilibrium in this state, it still regards perfect competition as an ideal state and believes that it is still more efficient than imperfect competition or monopolistic competition.