Competition

Question 1

What are the key assumptions of the orthodox view of competition?

Answer 1

• there are a large number of small firms
• Price = marginal cost
• producing a homogeneous product
• no restrictions on entry into or exit from the industry
• Pareto optimal outcome
• Market clearing
• Free markets are the benchmark

Question 2

What are the limitations of the neoclassical view?

Answer 2

• Firms are price makers not price takers
• Not homogenous goods
• Profits are not competed away (Eatwell, 1982)

Question 3

What does the Marxian/ Classical view say?

Answer 3

Drops the market clearing assumption and understands that there is some level of permanent market power that derives from surplus as pointed out by Ricardo. They argue instead that competition is based on the free-movement of capital. Capital competes for markets not within markets. IRTS
No efficiency assumptions

Question 4

What is the Austrian perspective?

Answer 4

They are free-marketeers but they still have a surplus approach, therefore there must be some degree of market power to provide the profit. Profits will not be competed away because this would destroy the incentives and would reduce the growth rate. Austrians argue that new products and techniques generate temporary monopolies and large profit for entrepreneurs through market power, this is essential to stimulating economic change

Question 5

Who advocated for the Marxian classical view?

Answer 5

Baran and Sweezy (1966)

Question 6

What is advocated for in the Marxian classical view?

Answer 6

Competition within markets will be unstable, the big firms will dominate through internal growth as illustrated by Steindl through investment in capacity utilisation and retained earnings, this is known as concentration and external growth from mergers and takeovers. This is called centralisation. The implications are that all the main markets will become dominated by a few big producers in oligopoly where they become too big to swallow each other and interact solely as rivals. Competition is only to eliminate new entrants. Competition is instead at the margins

Question 7

What is Kalecki’s view of monopoly?

Answer 7

Kalecki’s degree of monopoly measures market power that influences pricing and income distributions (Sawyer, 1988). Surplus tends to rise under monopoly capitalism as competition shrinks (Baran and Sweezy, 1966)

Question 8

Who talked about firms dominating through internal growth?

Answer 8

(Steindl, 1985)

Question 9

What are the consequences of an increasing surplus under monopoly capitalism?

Answer 9

The macroeconomic consequences of a rising surplus are deflationary unless corporate and government spending are kept at sufficiently high levels through corporate policy or Keynesian government fiscal policy.

Question 10

Who do you reference for the Austrian view of competition?

Answer 10

Kirzner, 1997

Question 11

What are the key assumptions of perfect competition?

Answer 11

• Large number of buyers and sellers
• Perfect information
• Price takers
• No transaction costs
• No externalities

Question 12

How does reality differ from the perfect competition example?

Answer 12

• Firms have market power
• Information asymmetry
• Transaction costs

Question 13

What is the institutionalist view of competition?

Answer 13

Institutional economists, such as John R. Commons and Oliver Williamson, believe that competitive equilibrium is not a useful concept because it ignores the role of institutions in the economy. They argue that institutions, such as laws, regulations, and social norms, shape the behaviour of firms and markets, and that these factors must be taken into account when analysing the econom

Question 14

Under cumulative causation, why have developing countries struggled?