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Apart from allocative efficiency many economists and non-economists think that
under perfect competition goods and services will be provided at the lowest cost
possible which means that as little of the societys wealth is used in the
production process as necessary and this is termed as Productive Efficiency.
There are further desirable effects that follow from perfect competition. The
price at which goods or services is sold never rises above the marginal cost of
production. In this case costs for this purpose include a sufficient profit margin
to encourage the producer to invest his capital in the industry in the first place
but no more than that.
Monopolists on the other hand flee from the constraints of competition may be
high cost producers. In the competitive market, it is said that producers will
constantly innovate and develop new products as part of the continuing battle of
striving for consumer business. Thus competition may have the desirable
dynamic effect of stimulating important new technological research. These
beneficial effects would flow from a state of perfect competition if such a state
could ever exist.
What perfect competition means is that on any particular market, there is a very
large number of buyers and sellers all producing identical or similar products and
that consumers have perfect information about market conditions. Also that
resources can freely flow from one area of economic activity to another and that
there are no barriers to entry which might prevent the emergence of new
competition nor barriers to exit which might hind firms wishing to leave the
industry.
In the long run the tendency of this will be to force producers to incur the lowest
cost possible in order to be able to earn any profit. Eventually the point will be
reached where price and the average cost of producing goods necessarily
coincide and this will mean that price will never rise above cost. If on the other
hand price were to fall below cost, there would be an exit of capital from that
industry and as the output would therefore decrease price would be restored to
a competitive level.
MONOPOLIES
Monopoly is the extreme opposite to perfect competition. They exist when there
is only one supplier for a particular product and there is no close substitute for
that product.
The objection to monopoly does not stop there, there is also the problem that
productive efficiency may be lower because the Monopolist is not constrained by
competitive forces to reduce costs to the lowest possible level. Instead the firm
becomes inefficient, resources are used to make the right product but less
productively than they might be. Management spends too much time on the golf
course, outdated industrial processes are maintained and a general laziness
creeps into the organisation. Furthermore the monopolist may not feel the need
to innovate because he does not experience the constant pressure to go on
attracting customers. Thus it has been said that the greatest profit of the
Monopolist is the quiet life he is able to enjoy.
Another objection to the monopolist is that since he can charge what he likes, he
is the price maker and wealth is transferred from the consumer to him and this
may be particularly true where he is able to discriminate between consumers
charging some more than others. Moreover it has been argued that the very
prospect of earning large monopoly profits can encourage firms to misallocate
resources and this induces wasteful expenditure. In attempts to acquire a
monopoly position which is a loss to society at large.
QUESTIONING THE THEORIES
We have said that the theory of perfect competition is only a theory and that
such conditions are extremely unlikely. Between the market structure of perfect
competition and monopoly, there are many intermediate positions. Many firms
will sell products which are slightly different from their rivals or will command
some degree of consumer loyalty which means that an increase in price will not
necessarily result in a massive loss of business. In such a situation there is said
to be monopolistic competition. This means that on the one hand the producer
enjoys some monopolistic power in respect of products differentiated from that
of others but on the other hand that the consumers loyalty to a particular brand
is not endless and that he will switch to a competitors brand if the price rises
too greatly. It is also unlikely that a customer will have such complete
information of the market that he will immediately know that a lower price is
available elsewhere for the product he requires. Yet the theory depends on
perfect information being available to the consumer. In the same way monopoly
in its purest sense is extremely rare and a point may come when even a firm
which produces the entire output of one particular product will find that it has
raised prices so high that consumers cease to buy.
Much more likely is the situation where one firm dominates a market without
having a complete monopoly. That firm may be able to behave in a manner
similar to the monopolist. But the complex economic problem is to establish at
what point a firm has the requisite degree of power to be able to do so.
Apart from the fact that perfect competition and pure monopoly are unlikely,
there are other problems with the theory itself. It depends on the notion that
all business people are rational and that they always attempt to maximise profit
but this is not necessarily the case.
Directors of a company may not think that earning fast profits for the
shareholders is the most important consideration they have. They may be more
interested to see the size of their business grow or indulge themselves in the
quiet life that monopolists may enjoy.
Another problem with the theory of perfect competition is the assertion that
costs are kept at an absolute minimum which is not necessarily correct. It may
be correct as far as the private costs of the developer are concerned but it does
not take into account the social costs or externalities as they are known which
arise from society at large; from for example the air-pollution that a factory
causes or the injuries caused to workers because of cheap machinery used which
does not include satisfactory safeguards against injury.
It has been argued that competition law should not concern itself with those
social costs and that this is a matter best left to specific legislation on issues
such as conservation, the environment, health and safety at work. It would also
wrong to suppose that the monopolist does not produce social costs but none the
less it is reasonable to sceptical of the argument that in perfect competition
costs will be inevitably kept at a minimal level. So given these doubts it might
be wondered whether a pursuit of an ideal is worthwhile at all.
Some economists have argued that the most common market form is oligopoly
and therefore competition policing ought to be designed around an analytical
model of this phenomenon rather than on the theory of perfect competition.
Where the minimum efficient scale is very large in relation to total output, a
separate question arises as to how industries can be made to operate in a way
that is beneficial to society as a whole. One of the solutions may be
Nationalisation.
1. Nationalization
Whatever the solution to the problem of natural monopoly, the point at this
stage is simply that efficiency of scale presents difficulties for the theory of
perfect competition. Equally it might be that social or political value judgments
lead to the conclusion that competition is inappropriate in a particular economic
sector. For example in the US, Agriculture is an obvious example and the
legislator has tended to view that agriculture possesses special features entitling
it to protection from the potentially ruthless effects of the competitive system
and especially outside foreign competition.
Another example is the labour market which is not fully exposed to the
competitive process and there is a tendency to refrain from insisting that
professionals should engage in price competition in advertising.
Another example which is more important in practice is that two or more firms
acting together and restricting competition between themselves may be able to
develop new products or to produce goods on a more efficient scale. For
example in the pharmaceutical industry the benefits to the public at large may
be considerable.
Another objection is that the notion of striving for superiority may be considered
ethically unsound. One of the arguments is that cutthroat competition means
that firms are forced to charge lower prices until in the end the vicious cycle
leads them to charge below marginal costs in order to keep customers at all.
The inevitable results will be insolvency.
This discussion on the theory shows that the issue is not as simple and one must
decide whether competition has any properties sufficiently beneficial to justify
its protection. The conclusion would seem to be that notwithstanding the doubts
expressed sufficient benefits may be expected to flow from competition to
warrant some system of control. In particular monopoly does seem to lead to a
restriction in output. There is a greater incentive to achieve productive
efficiency in a competitive market and competition is likely to leave the
consumer with a greater degree of choice. However if perfect competition is not
attainable the question arises as to whether there is any other economic model
to which it could be reasonable to aspire to.
Some economists have settled for the theory of workable competition, they
recognise the limitations of the theory of perfect competition but nonetheless
consider it worthwhile seeking the best competitive arrangement that is
practically attainable. Again what is workable competition and what it should
consist of has caused some theoretical difficulties. However a workable
competitive structure might be expected to have a beneficial effect on conduct
and performance and therefore be worth striving for and maintaining. If it is
accepted that workable competition is desirable then a competition law
designed to protect it will need to deal with four problems:
CONTESTABLE MARKETS