Rebirth of Reason


Pure and Perfect Competition: An Unrealistic and Mistaken Ideal
by Edward W. Younkins

Antitrust regulation is based on an unrealistic economic model that compares the structure of existing markets with an arbitrary abstract ideal of pure and perfect competition that can never be attained in the real world. This model, which is used as a benchmark to judge monopoly and for resource misallocation analysis, includes the following conditions:  (1) homogenous and unchanging products offered by all the sellers in the same industry;  (2) numerous sellers who individually have insignificant impacts on prices;  (3) the possession by all market participants of perfect knowledge with respect to all relevant information;  (4) no barriers to entry or departure to and from the market (i.e., ease of investment and disinvestment through equal and costless entry and departure);  (5) firms do not cooperate (i.e.,  collude);  (6) no fear of retaliation by competitors in response to a firmís actions;  (7) no need for advertising;  and (8) economic profits tend toward zero.

The traditional antitrust model teaches that competitive markets tend toward equilibrium where price, marginal cost, and minimum average cost are all equal and where consumer welfare is maximized. According to this perspective, consumer welfare could not be maximized if companies advertised, products were differentiated, some firms could achieve economies of scale that are unobtainable by their competitors, or if collusion or high market share could lead to a degree of control over market prices.

The traditional antitrust model is irrelevant in a dynamic business world involving imperfect information. True competition is a process, not a structure, in which a profit-seeking company, operating with limited information, attempts to coordinate production and distribution with the desires of potential customers.

Real-world divergences from pure and perfect competition are not necessarily indicative of market failures. Companies should advertise and attempt to differentiate their products. Competition in a free market includes the process of observing and adjustment under conditions of uncertainty involving both cooperation and rivalry. An innovative firmís lower costs should keep high-cost firms out of the market. When price exceeds cost, information and incentives are provided to entrepreneurs to invest resources in a particular line of business.

Antitrust regulation undermines the discovery process. Regulators, judges, politicians, and economists cannot know the most efficient organization of an industry, including the number of firms it should include, what prices they should charge, and what kinds of contractual agreements they should make with retailers, consumers, and each other. Such knowledge can only emerge through a trial and error discovery process in the marketplace. The essence of a free market is not pure and perfect competition but rather the freedom to compete.

According to George Reisman, the Platonic ideal of pure and perfect competition has been derived from an ideology that is based on the collectivist view that the individual human person is subservient to a greater entityóSociety, the State, or Mankind. It follows that private property is not truly privateóit is merely held as a trustee for the real owner, Society. The reasoning is that Society has a preemptive right to the property of every producer and permits him to continue in business only for the time and to the extent that Society considers to be in the maximum interest of all.

It follows that acceptance of the altruist ideal of unrewarded service to others is behind the antitrust model of pure and perfect competition. According to altruist morality, the conduct the model requires is pure and perfect. It portrays a world in which no one can succeed at the same time that others fail. Consequently, all firms participate in a process that yields equal benefits to all. The traditional economic theory of antitrust is based on the following philosophical premises:  (1) Selfishness is immoral;  (2) Capitalism is based on selfishness;  (3) Capitalism is therefore immoral and leads to immoral consequences; and (4) Social (i.e., distributive) justice is the moral basis for judging business behavior.

Even advocates of capitalism such as the economists of the Chicago school rely on neoclassical price theory, cost-benefit analysis, and the model of pure and perfect competition as the consumer welfare standard for a firmís real-world performance. These economistsí use of tools such as concentration ratios, consumer surplus analysis, market share analysis, Herfindahl indices, Gini coefficients, and others, evidences their underlying altruist premises. Any market that does not meet the economistsí altruistic Platonic standard is deemed to be a threat to competition and is censured. Successful businesses are thus punished for not being passive, altruistic servants of society.

Sanctions: 22Sanctions: 22Sanctions: 22 Sanction this ArticleEditMark as your favorite article

Discuss this Article (11 messages)