Types of market structures and a historical overview of the concept of competition

This article will be devoted to the market structures created by the neoclassical mainstream school. It will take a retrospective look at the concept of competition from classical economists onwards, and thus answer the question of why and how the models of perfect and imperfect competition were created.

First, what is a market? Everyone has heard this widely used word, but what exactly does it express? It is the act of exchanging a good or service between two parties, with both initially evaluating the good/service offered to them as more valuable than the one they own. If this were not the case, they would not agree to an exchange. Their expectations are that they will receive more satisfaction after the exchange. Of course, they may be wrong and understand it later, but at the time of concluding the deal they do not think so. The set of many such exchanges is the so-called market. Examples can be both the purchase and sale of a newspaper, a computer, bread, and the conclusion of an employment/civil contract.

What determines the existence of market relations? First of all, private ownership of the means of production and their legal protection. From this follows the existence of prices. The price is essentially a substitute for information. If it is not centrally manipulated, it shows consumer desires and guides and assists us on the entrepreneurial route with the final stop “what and how to produce”. Unmanipulated prices, i.e. where there is no non-market intervention, are one of the greatest goods we can have. I will not go into details and protection of the free market, but I simply have to mention that this is the path to economic growth.

The next important concept is competition.

And while so far we have had no disagreement about the concepts (there are only disputes about whether there should be a free market or not), here there is already a dispute among economists about the essence of the concept. For the mainstream (i.e. the contemporary and prevailing opinion), which is made up of the neoclassical school of economics at the micro level, competition is a state in which there are a large number of small-sized firms on the market that offer a homogeneous product and possess complete or perfect knowledge. This is the so-called model of perfect competition. The market structure determines the level of competitiveness. Economists from the “Austrian” school, in particular Hayek and Kirzner, hold the opposite opinion. According to them, there is no competition in the model proposed by the neoclassicals. By competition they understand competition/rivalry, and its very expression is the offering of a better product (in terms of price and quality) compared to the competition. Competition for the “Austrians” arises from the possibility that producers can offer a good or service that is different from that of their competitors. And since no one has perfect knowledge, producers cannot know anything for sure before passing the market test. It follows that competition for the “Austrians” is a process of discovery. Since it is clear that the model of perfect competition does not reflect reality and is simply a theoretical proposition, the neoclassicals create market structures that are divided into three main groups and are based on imperfect competition – monopolistic competition, monopoly and oligopoly.

Monopolistic competition– first formulated by the American Edward Chamberlain in the 1930s. The characteristics of this structure compared to perfect competition in the long run are almost identical. The main differences are that in monopolistic competition, producers offer heterogeneous products and there is non-price competition. Producers, although they make a profit in the short term, cannot maintain it in the long term and if they do not raise the price (they can afford it because of the reputation of the brand), they will be exactly at the so-called "dead point". Characteristics:

• a large number of sellers and buyers and no dominant corporation;
• consumers realize that there is non-price competition;
• there are relatively few barriers to market entry and exit in the short term and none in the long term;
• Manufacturers set the price, not take it “for granted.” Due to the relatively differentiated products, they have control over the market, although not complete.

Oligopoly– a structure in which a few producers (four in number) control over 50% of the market share. There are situations in which there is a formal agreement between several producing companies, known as a cartel. One of the most famous examples of this is OPEC. Characteristics:

• few producers;
• relatively high barriers to entry and exit from the market;
• possibility for producers to determine the market price;
• interdependence between large producers in the market.

Monopoly– first formulated by Aristotle, who called Thales a monopolist. This is a structure in which one producer has complete control over the market and because there are barriers to entry, he has absolutely no competition. He has the opportunity to determine the price, quality, quantity of the goods/services he offers. In developed capitalist countries, there is a monopoly in the form of intellectual property rights (trademark, copyright, patent).

If the neoclassical concept of competition is accepted, then its logical consequence is antitrust (antimonopoly) legislation. If, on the other hand, the “Austrian” view is accepted, then these laws are useful only on the condition that market structures influence the process of rivalry. Something for which we have no evidence. Economists of the Chicago school (which is in its essence neoclassical) openly declare that antitrust laws harm more than they help. Examples are both Milton Friedman (“Free To Choose”) and Robert Bork (“ The Antitrust Paradox”).

But how did neoclassicals create the concepts of perfect and imperfect competition?

Even the classics, mainly represented by Adam Smith, talk about competition. It is clear that mathematics had not entered economic theory that much at that time. All the classics, except for two, understood competition as a state in which there is no government assistance for a particular market participant. For Smith, in particular, competition was the freedom of each producer to oppose the others, without the government interfering with grants, privileges, free trade and the absence of barriers to entry/exit from the market. His only deviation from this point of view was the commodity land, because it has a fixed quantity supplied. David Ricardo differed almost nothing from Smith's view. For another classic, John Stuart Mill, monopoly is the opposite of competition - government assistance in any form. However, he continues the discussion of monopoly with the concept of "natural monopoly", consisting of two parts: "land" (from land, earth) monopoly and "natural" (or natural), in which a certain individual has an exceptional gift or skill.

In contrast to these three classics, as I mentioned earlier, two other classics – William Nassau Senior and John Elliott Cairns – expanded the concept of monopoly. According to the former, if a given good is not produced under strict “level playing field”, there is a monopoly. This, as he notes, is a fairly common phenomenon. Senior divides monopoly into four classes: 1) when one product is more efficient than another and can therefore be produced at lower costs and offered at a lower price; 2) natural products (a commodity that is inherently scarce); 3) patents and copyrights; 4) land monopoly. John Cairns, the last classic, also expanded the concept of monopoly. The fundamental difference between him and the others is that while the other classics define free competition as a system in which, in the long run, prices will equalize with the costs of production, he defines the result or consequence – the equalization of prices with the costs of production – as free competition. This also leads to his negative contribution to economic theory, which influenced the neoclassicals and created their ideal of competition – not a process that in the long run will tend to equilibrium, but equilibrium as an end in itself. And since the equilibrium level is extremely difficult to reach, a position similar to that of Cairns is adopted – any deviation from the equilibrium position has inherent elements of monopoly. And this means that the entire market economy consists of monopoly elements.

Origin and creation of the theories of perfect and monopolistic competition

French mathematician Antoine Augustin Cournot created not only mathematical economics but also the modern theories of perfect and monopolistic competition with his book Principes (1838). To facilitate the calculation of profits, revenues, and costs, he defined competition as a situation in which price does not change with a change in the quantity of output produced; where the demand curve is horizontal or perfectly elastic. Not only did he create the basis for the theory of perfect competition, he also explained that the latter exists only and only when there are a large number of producing firms, and when this is not the case, an oligopoly is observed. He also created the concept of a duopoly.

In 1871, neoclassical economics began. Three economists separately created a subjective theory of value. Leon Walras, the father of modern mathematical economics, started from the same foundation as Cournot, but from a different perspective. While Cournot moved from monopoly to free competition, Walras considered free competition to be a general case and monopoly to be a particular case. The Austrian Carl Menger, founder of the "Austrian" school of economics, had a similar view of competition to the classics and gave the British East India Company and the medieval guilds as examples of monopolists. The last of the three was the Englishman William Stanley Jevons, who pushed economic theory towards the concept of "perfect competition", rejecting the classical view of competition. For him, "perfectly free" competition exists not only in the absence of price discrimination, but also in the presence of a large number of demanders and suppliers in individual markets.

His idea of a perfect market is a perfect knowledge of the levels of supply and demand by all participants. However, he realized and wrote in the preface to the second edition of his Theory of Political Economy that since all goods are unique in themselves, "property is synonymous with monopoly". It follows that for him in a market economy "monopoly (by its definition) is limited by competition, and no owner can acquire a larger share than other owners of the same property are willing to accept". Jevons was the first to give a precise definition of perfect competition. His follower was his compatriot and mathematical economist Francis Isidro Edgeworth, for whom perfect competition is a condition in which there is an infinite number of producing firms and complete divisibility of the product.

Another Englishman, Alfred Marshall, did not have a clear and precise position on competition. On the one hand, he was on the side of the classics: he considered competition a broad concept and attacked the theory as perfect; he believed that a negatively sloping demand curve indicated the presence of competition. On the other hand, he was influenced by mathematicians, and in particular by Cournot. According to him, the horizontal demand curve is predominant in the economy, and the sloping one is an exception. In 1899, the American neoclassical economist John Bates Clark published " Distribution of Wealth". In this way, he introduced further restrictions on Edgeworth's definition of perfect competition: labor and capital must be absolutely mobile. Despite his theoretical contribution, Clark was against perfect competition being a criterion for the real economy and, like the classics, he considered it an ultimate equilibrium goal, not a prevailing one in the dynamic real economy. For him, even if there is only one producer in an industry, although considering the situation dangerous, he sees certain advantages in the face of "possible competition": if the price is higher than the production costs, it cannot be significantly higher, because, if so, it would be an invitation for competing producers to enter the market.

We come to the economist who united all the previous elements into a general theory of perfect competition – Frank Knight, one of the founders of the Chicago School. In his “ Risk, Uncertainty, and Profit” (1921) he believes that the theory is applicable to the real dynamic economy, something with which, as I have already mentioned, Clark disagrees. Knight, in turn, provokes a response from Edward Chamberlain, who in 1933 created the theory of monopolistic competition, believing that the method used by Knight is unrealistic and, if used, leads to the conclusion that markets are injected with monopoly elements.

Conclusion

Clark, addressing Chamberlain, writes "why should we call this well-functioning market economy 'monopolistic' when in fact it is 'competitive'?"

Ultimately, what matters for the existence of competition is not perfect knowledge or a perfectly elastic demand curve, but the absence of centrally privileged actors that hinder market competition.

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