Kinds of competition
- Historically, economists distinguished between two broad kinds of industrial organization (the sellers' arrangement within a specific market):
- Competition (often identified with perfect competition)
- Monopoly (or the lack of competition)
- In fact, monopoly was mostly ignored by classical economists:
Harold Demsetz has counted only one page in 90 devoted to monopoly in The Wealth of Nations and only one in 500 in Mill’s Principles of Political Economy. (Stigler 2008)
- During the 1930s a third category emerged thanks to the work of Edward Chamberlain and Joan Robinson (respectively at Harvard University and Cambridge University
3. Monopolistic competition
Perfect competition
- What are the necessary and suffiicient conditions for perfect competition?
- First, we need to identify the state of affairs that characterizes perfect competition. We then deduce these conditions
- Standard definition: Zero economic profits (What are economic profits?)
- Cournot (Mathematical Principles of the Theory of Wealth) first formalized this "zero profits conditions" and derived the following formula:
\(C=R\Rightarrow \Delta C=\Delta R \Rightarrow \Delta C=\frac{\Delta Q}{\Delta Q} P+\frac{\Delta P}{\Delta Q} Q \Rightarrow \Delta C=P+\frac{P}{\epsilon}\). For the market as a whole, this gives: \(P=MC-\frac{P}{n\epsilon}\)
- What is \(P\) equal when the number of firms is arbitrarily large?