Theory of Perfect Competition = Bollocks

There. Had to be said. Lynne Kiesling and Don Boudreaux say as much without quite calling the spade a spade. The standard textbook theory of "perfect competition" exists only when there is no competition. Any analysis that starts with the assumption that the textbook theory of perfect competition is in any way related to reality is DOA.

Don explains further why the theory is bollocks:

The only reason the newly differentiated product sells at a price higher than the price charged when the market was “perfectly competitive” is that the consumers who buy this differentiated product value it more highly than they value the undifferentiated product – the one still sold by the many firms remaining in the “perfectly competitive” part of the industry. Because, by assumption, many firms make up a “perfectly competitive” industry, any consumer who does not want to pay the higher price for the differentiated product can satisfy all of his demands for this industry’s output by buying as much as he wants of the undifferentiated product from the other firms, all at the lower price.


In short, the only reason product differentiation leads to higher prices and less-elastic demand curves is because it appeals to consumers – it makes them better off compared to how they were before the differentiation occurred.

Which is, of course, the whole point of competition, and thus illustrates the absurdity of the Perfect Competition concept.

Lynne tells us what we should know about reality in lieu of bollocks:

Perfect competition only exists on the blackboard. Get over it. Think of it as a theoretical benchmark, not necessarily the desirable endpoint of a linear progression from monopoly to competition. Real, dynamic, Schumpeterian competition is nonlinear, and makes the static concept of perfect competition less relevant to real human action.

The real world is messy and dynamic, and constantly changing. Competition, in part, is the continual adjustment by firms to ever changing circumstances, and not simply an optimization equation run in static equilibrium...

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Modern antitrust officials

Modern antitrust officials don't adhere to the textbook "perfect competition" theory; instead they obsess over marginal cost and homogenous product definition to the point where you can't really discern any sort of economic model. The underlying premise is that whatever level of competition exists today is the "ideal" and that any reduction in that level is inherently bad.

Just because a consumer

Just because a consumer FEELS they are better off does not necessarily mean they are quantitatively better off. Drinking Coca-cola at 75 cents a can does not make me better off than if I bought Sam's Cola at Walmart for 20 cents a can. Nor does eating organic vegetables provide any quantitatively better nutrition than fertilized veggies.

What matters is quanitatively differentiable products. This is a direct result of perfect competition, not a cause of it. Companies in perfect competition get into price wars (like airline tickets today) and force the more poorly performing competitors out of business (witness the bankruptcy of US Airways). The presence of competition implies that there will be winners and losers, and the losers either figure out how to become winners by either producing better product or packaging and selling it better, or they die off. You innovate or perish. Differentiate or perish.

The perfect competition is the threat of mediocrity that erodes stock prices and dividends, and destroys executive careers. Those for whom 2nd place isn't good enough learn to abhor perfect competition, and avoid it one way or the other.

Mike Lorry, Organic

Mike Lorry,

Organic vegetables are fertilized.

:beatnik:

:lol:this is the best and

:lol:this is the best and most interesting think i have read in my life about economics!...perfect competition is bullshit and i the worst thing about it is that i have to write an essay about how great it is!...small is beautiful - perfect competition, big is powerful - economies of scale. i dont think they have anything in common appart from one works and the other not. i think my lecturer is gone completely mad. I doubt he can write an essay on that!...:wall:

Hi, I am trying to find a

Hi,
I am trying to find a company that fits the definition of "prefect competition" in microeconomic terms so I can write a project on it. I am new to Microeconomics. Which sectors(s) and which company(ies) are good exmaples of it?

Thanks for a reply.

Raziye

to what extent does this

to what extent does this theory of perfect competition inform Australias national competition policy?

Giselle, I am not aware of

Giselle,

I am not aware of Australia's national competition policy. Do you have some links on background material?