Concepts of Competition for Managers

My essay, on moodle

Three Sections

• The textbook model which we have already discussed.

• A model of competition is not THE model of competition

• Alchian’s natural selection model of the firm

Three Sections

• The textbook model which we have already discussed.

• A model of competition is not THE model of competition

• Alchian’s natural selection model of the firm

Three Sections

• The textbook model which we have already discussed.

• A model of competition is not THE model of competition

• Alchian’s natural selection model of the firm

A model of competition is not THE model

• Our usual model

• Large numbers• Perfect information • Homogeneous products• Free entry and exit

This model has been very successful in its intended purpose

• A theoretical foundation for ordinary supply

• Existence of general equilibrium• Efficiency of general equilibrium– Any competitive equilibrium is a Pareto optimum– Any Pareto optimum is a competitive equilibrium (Under restricted conditions)

But a model that is good for one purpose may not be good for other purposes

Demsetz interest is was public policy.

• The model is a dramatic simplification

• Though successful, the things that it excludes may be important in the real world

• And their importance may not merely be that they make the model less accurate.

Particularly antitrust

• In the standard model, when we see advertising, we might conclude the presence of monopoly power.

• In the standard model, if we see firms engaged in price calculation, we might conclude monopoly power.

In fact, much of antitrust policy and other industrial policy has done just that.

However, these conditions may not reflect industrial concentration

• Imperfect information, rather than monopoly power, explains much of advertising.

• Imperfect information, rather than monopoly is a likely explanation of price calculation

Our purpose in this course is not antitrust policy, but rather is understanding the competitive environment of firms.

More specifically, what is the competitive environment of my firm?

So, while the formal competitive model is successful, it may be misleading for our purposes

New products, new contracts, new approaches in general

• These are a vital part of any real economy. The standard model does not accommodate these very well.

• Competition is a process of discovery– of prices– of new products– of new kinds of relationships, business models,

etc.

Demsetz quotes Hayek

The formal model of competition deprives the verb “compete” of any real meaning.

Perfect competition, like monopoly, is a quiet life.

Continuing our theme:

• What kind of a market are we in?

• In real-world competitive markets, there is a lot of real competing going on.

• And yet true monopoly power may be scarce and fleeting.

Connections

• To Porter and Koch

A few things about Armen Alchian’s Uncertainty, Evolution and Economic Theory

Key Ideas

• In the presence of uncertainty, firms face a very difficult problem

• There is not a best think to do, but there will be a best think to have done.

• Profits are the selection mechanism. Positive profits are necessary for survival

Adoption versus adaptation

• Firms can adapt to the world, but ultimately, the economy adopts some (they survive) and rejects others.

• Yet even in a world of pure adoption (no conscious adaptation) economic models will predict.

• Those whose behavior is consistent with efficient responses are more likely to survive

Which is not to say…

…….That there is no role for adaptation.

Efficient methods of various sorts can improve performance, just don’t expect them all to work.

Reproduction and variation

• Evolutionary models incorporate survival, reproduction and variation.

• Profits determine survival• Imitation is corresponds to reproduction

• Variation? – Deliberate innovation– Unintended innovation: Imperfect immitation

Continuity is provided by

• Firms have policies, practices, rules of thumb that define the firm. (An RBV notion)

• Personnel practices including recruitment, training and development also play a role

• Enhanced standing for rules of thumb

And yet…

• Long term survival may not demonstrate insight or wisdom

• Borel trial: Two million Frenchmen flipping coins. Eight hours a day….etc. If they could transfer their position in the game to their heirs, a few dozen are still playing after a thousand years.