THE ECONOMICS OF

IMPERFECT COMPETITION

Books by Joan Robinson

INTRODUCTION TO THE THEORY OF EMPLOYMENT

AN ESSAY ON MARXIAN ECONOMICS

THE ACCUMULATION OF CAI'ITAL

ESSAYS IN THE THEORY OF ECONOMIC GROWTH

EXERCISES IN ECONOMIC ANALYSIS

ECONOMIC HERESIES

THE ECONOMICS OF

IMPERFECT COMPETITION

JOAN ROBINSON

SECOND EDITION

ST. MARTIN'S PRESS

ISBN 978-0-333-10289-3 ISBN 978-1-349-15320-6 (eBook) DOI 10.1007/978-1-349-15320-6

Preface ©Joan Robinson 1969 Reprint of the original edition 1969

All rights reserved. For information, write: St. Martin's Press, Inc., 175 Fifth Avenue, New York, N.Y. 10010

First edition 1933 Reprinted 1934, 1936, 1938, 1942, 1945,

1946, 1948, 1950, 1954, 1959 Second edition 1969 Reprinted 1972, 1976

PREFACE TO THE SECOND EDITION

IMPERFECT COMPETITION, THEN AND NOW

MARsHALL's view of competition was not very precise. An un­foreseen rise in the demand for a particular commodity would lead to a rise of output, higher marginal cost being accompanied by a higher price. When demand was low, "fear of spoiling the market" would prevent prices from being cut. As time goes by, firms grow in size and enjoy economies of scale. Economies internal to the firm reduce average cost of production (which includes profits at the normal rate on the capital invested) and the benefit is passed on to the public in lower prices. To meet the objection that the firm which first begins to grow can under­sell the rest and gradually establish a monopoly, Marshall fell back on the analogy of trees in the forest. A firm is identified with a family. The sons of the founder are enervated by being brought up in the comfort that his money provides so that the expansion of the firm that he began will peter out. It is true that a joint-stock company is not bound to the life of a family but, says Marshall, joint-stock companies stagnate.1

Pigou transformed all this into a neat, logical system. Perfect competition means that the individual producer can sell as much or as little as he likes at the ruling price. Each firm con­tinuously produces the amount of output of which the marginal cost is equal to price. There are internal economies of scale only up to a certain size, at which average cost (including a normal profit) is at a minimum. When demand is such as to call forth output beyond this size from a particular firm, marginal cost, and therefore price, exceeds average cost. Super-normal profits call in fresh competition which brings down the market price and pushes back the output of the firm. When price is below average cost, some firms are driven out of business, and those

1 Principles of Ec0110micB {seventh edition), p. 316. v

vi ECONOMICS OF IMPERFECT COMPETITION

that remain expand. Thus the optimum size of firm, with minimum average cost, is always tending to be established.

Here we were, in 1930, in a deep slump, and this is what we were being asked to believe.

The first point in Pigou's scheme was patently absurd. Under perfect competition, any plant that was working at all must be working up to capacity. (Some, for which prime cost exceeded price, might be put out of operation altogether.) Imperfect competition came in to explain the fact, in the world around us, that more or less all plants were working part time.

The notion that every firm is facing a falling demand curve for its own product and that profits are maximised at the out­put for which marginal revenue is equal to marginal cost, provided an explanation for a situation in which firms could work their plants at less than full capacity and still earn a profit.

This notion was already in the air, but ideas at that time were in a very primitive state. I remember the moment when it was an exciting discovery (madB by R. F. Kahn) that where two average curves are tangential, the corresponding marginal curves cut at the same abscissa. The apparatus which we worked out took on a kind of fascination for its own sake (though by modern standards it is childishly simple) and I set about to apply it to the rest of Pigou's system. This reached its culmina­tion in the analysis of price discrimination. I think that this is still useful and that it is worthwhile to master the apparatus for its sake. But to apply the analysis to the so-called theory of the firm, I had to make a number of limitations and simplifications which led the argument astray.

The first was a shameless fudge. I postulated that a firm could find out the conditions of demand for its product by trial and error-that is, I treated the conditions of demand as being unchanged for an indefinitely long period and I assumed that experiments with prices would leave no traces in market condi­tions. The whole analysis, which in reality consists of com­parisons of static equilibrium positions, is dressed up to appear to represent a process going on through time.

To put the argument into a dynamic setting, it is necessary to distinguish between the short-period aspect of competition, which is concerned with price policy and the utilisation of pro-

PREFACE TO THE SECOND EDITION vii

ductive capacity already in existence, and the long-period aspect, which is concerned with investment.

In manufacturing industry, the producer sets a price and sells as much as the market will take; he therefore has to have a price policy. (Marshall, with his usual instinctive cunning, took the example of a commodity which was sent to market and sold for what it would fetch; in his story of the supply and demand for fish he had no need to bring price policy into the argument.) A perfectly competitiye price policy would be continuously to follow the variations of demand so as always to be selling full capacity output (except when price fell below prime cost). This is clearly absurd. By this standard, competition is never perfect. Prices are formed by setting a gross margin, in terms of a per­centage on prime costs, to cover overheads, amortisation and net profit. To calculate the appropriate margin, it is necessary to estimate the expected sales from given plant and to take a view of what net profit may be hoped for. In the controversies which arose over imperfect competition, a policy of this kind was described ·as "full-cost pricing" but that is even more mis­leading than the formulation in terms of marginal revenue; the producer may know his total overhead costs for a period, but he cannot know what his average cost is going to be until he knows his rate of sales. Moreover the net profit that he hopes to make cannot be derived from costs alone, without any con­sideration of "what the traffic will bear".

It is true enough that businessmen cannot be expected to draw my curves for themselves; when we know the level of gross margins, it is pointless to try to deduce from it the value of ef(e- I) (e being the producer's subjective estimate of the elasticity of demand for his output) but it is perfectly sensible to say that the "degree of monopoly" is higb.er,l or price policy less competitive, when the producer, in setting his margin, calculates upon a lower level of utilisation of plant and upon a higher rate of profit on capital.

The concept of perfect competition is totally inapplicable to manufacturing industry (it is doubtful whether nowadays it applies even to fish). The prices of manufactures in the nature

1 Kalecki has been criticised for taking the ratio of margins to prime costs as the definition of the degree of monopoly instead of as a symptom of it. See The Theory of Economic Fluctuations, Section I.

viii ECONOMICS OF IMPERFECT COMPETITION

of the case are administered prices. With short-period fluctua­tions in demand, prices vary very little as long as money costs are constant. Output rises and falls with demand, and (as the overhead per unit of output falls and rises) the share of net profit rises and falls still more. Even in a seller's market when output is up to the limit set by capacity, firms usually prefer to lengthen delivery dates or ration customers, rather than to choke off demand by raising prices today for fear that it might be permanently lost. Movements of demand affect profits strongly, but prices hardly at all.

As for the question of what determines the rate of profit on capital, neither my critics nor my supporters had anything much to say about it.

The Keynesian theory of prices, that money-wage rates are the main determinant of prime costs and that the general level of prices moves more or less proportionately to the level of wage rates, ~as been made familiar by painful experience. This is sometimes connected with imperfect competition. It is argued that producers can "pass on to the consumer" a rise of costs because they are not competitive; but obviously if there were such a thing as perfect competition, with prices equal to mar­ginal costs, the movement would be automatic. A rise in money­wage rates would shift all the marginal costs curves propor­tionately upwards. With imperfect competition there is an element of judgement in price policy. Prices move sometimes more, and sometimes less, than in proportion to prime costs according to the general atmosphere of the times.

It was Michal Kalecki rather than I who brought imperfect competition into touch with the theory of employment. He showed that a rise in profit margins, such as may come about by defensive monQpolistic agreements in a slump, reduces real wages and so tends to increase unemployment. He also estab­lished the very striking proposition that a rise in margins increases the share of profit in the value of output only by re­ducing the share of wages. The total of profit over a period of time is not likely to be increased by it. Overall expendi­ture is not raised immediately, so that the main effect of raising prices is to sell less goods for more or less the same total receipts.1

1 Op. cit., Section 3.

PREFACE TO THE SECOND EDITION ix:

All this is concerned with the short-period aspect of competi­tion. To behave monopolistically in the long-period sense, means to pursue a cautious investment policy, restraining the growth of capacity relatively to demand. A monopolistic investment policy will generally be associated with a monopolistic price policy, but the converse is by no means generally true. This explains-what for the old theory was a paradox-that the firms which make the most monopolistic profits are often those which grow fastest. Galbraith points out that, in the United States, growth and competition are not generally associated. There are some competitive industries which conform to the orthodox ideal:

Yet almost no one would select them as a showpiece of American industrial achievement. The showpieces are, with rare exceptions, the industries which are dominated by a handful of large firms. The foreign visitor, brought to the United States by the Economic Co-operation Administration, visits the same firms as do attorneys of the Department of Justice in their search for monopoly.1

Marshall's contradiction between internal economies and com-petition cannot be resolved by Pigou's optimum size of firm, still less by the prediction that joint-stock companies will fail to grow. Rather it is resolved by recognising that there is no need to resolve it. Competition is always in course of bringing itself to an end. At any moment, in prosperous modern industries, the number of firms is tending to fall and competition is becom­ing more oligopolistic. My old-fashioned comparison between monopoly and competition may still have some application to old-fashioned restrictive rings but it cannot comprehend the great octopuses of modern industry.

Besides the static approach, there were some other serious limitations on my argument. I did not attempt to tackle duopoly and oligopoly and, concentrating on price as the vehicle for competition, I said very little about non-price competition, such as artificial product-differentiation, advertising and sales promotion, which in fact accounts for the greatest part of the wastefulness of imperfect markets. (The twin to my book, Chamberlin's Monopolistic Competition, opened up these sub­jects, but in the subsequent controversies Chamberlin appeared

1 J. K. Galbraith, American Oapitaliam, p. 96.

x ECONOMICS OF IMPERFECT COMPETITION to be more co~cerned to defend the market system than to expose its drawbacks.)

To get my simple analysis on to its feet, I had to assume that each firm was selling a single commodity. This has the effect of making the treatment of "industries" misleading. When I re­visited Imperfect Competition after twenty years I pointed this out.1

The assumption that each firm produces a single commodity conceals the distinction between the output of an industry-that is, a group of firms engaged in production of commodities alike in their methods of manufacture, and the supply to a market-that is, the demand for a group of commodities which are close substitutes for each other. In ordinary language when we speak of the cotton industry, the iron-founding industry, the boot-and-shoe industry (leather) we are thinking of a group of firms engaged in a certain type of production, governed by the kinds of object produced.and the materials of which they are made. Sometimes a single firm produces very diverse objects which are complements to each other, and therefore sold together (pens and blotting-paper, low­power electric motors and artificial teeth) and sometimes quite unrelated objects are bound together in production because they are bound together in selling by conventional shopping habits (hair-brushes and medicines). Many of the products of a single industry are extremely remote substitutes for each other. There is no overlap, for instance, between the markets for men's and children's shoes or for drain-pipes and stoves. On the other hand, products of totally different industries may be quite close sub­stitutes-rubber and leather shoes; asbestos and cast-iron drain­pipes.

The concept of an industry, though amorphous and impossible to demarcate sharply at the edges, is of importance for the theory of competition. It represents the area within which a firm finds it relatively easy to expand as it grows. There are often certain basic processes required for the production of the most diverse com­modities (tennis balls, motor tyres, and mattresses) and economies in the utilization of by-products under one roof. The know-how and trade connections established for one range of products make it easier to add different commodities of the same technical nature to a firm's output than it is to add mutually substitutable com­modities made of different materials, or made or marketed by radically different methods. Moreover, the members of an industry 1 Economic J aurnal, September 1953, and Collected Economic Papers, vol. i.

PREFACE TO THE SECOND EDITION xi have common interests and a common language, and feel a. kind of patriotism which links them together, even when they are in competition with each other. It is much easier to organize control over one industry serving many markets than one market served by the products of several industries.

The degree of concentration in an industry, measured by the proportion of its output produced by, say, the three largest firms, or the degree of monopoly in the sense of the closeness of the organization binding the firms, may have little relation to the degree of monopoly in the markets which it serves, in the sense of power to control prices. An unconcentrated and unorganized in­dustry may contain a number of very strong small monopolies over particular commodities, while another, highly concentrated or tightly organized, may be meeting competition in some or all of its markets from the products of rival industries which are sub­stitutes for its own. Nowadays the definition of an industry is breaking down in

another way. More and more, the great firms have a foot not only in many markets but in many industries, in several con­tinents, the connections between their various activities being neither in know-how nor in marketing but merely in financial power.

Since this book has long been used as a text for students, some of its weaknesses have been frozen into orthodox teaching but its strong points, I think, have had very little influence. The strong points are negative. They should have cleared away a lot of rubbish. Of course, nothing can be proved about the nature of reality by a purely a priori argument, but the analysis opened up some lines of thought which are still important, and still neglected, today.

First of all, by showing that perfect competition cannot obtain in manufacturing industry, it undermines the complex of ideas erected on the slogan of "price equals marginal cost". In the short period, prices equal to marginal cost would mean that small variations in demand produce violent changes in prices, as can be seen where competition reigns, that is, in the markets for primary products. What it would mean in the long period, with "normal profits", orthodox text-books have never made clear.

Another moral that the argument suggests is that consumer's

xii ECONOMICS OF IMPERFECT COMPETITION

sovereignty can never be established as long as the initiative lies with the producer. For the general run of consumer goods, the buyer is necessarily an amateur while the seller is a pro­fessional. To make industry genuinely serve the needs of the public, as it is supposed to do in the text-books, would require a monopsony of consumers, equipped with their own experts. Some slight efforts are being made nowadays to protect the con­sumer interest, but they cannot make much head against the power of advertisement. The great chain-stores exercise some monopsonistic influence in imposing a kind of synthetic perfect market on small-scale producers, but they cannot offer a counterweight to the great oligopolists. Besides, though they serve the consumer interest against the producer, they also have some interests of their own.

Finally, what for me was the main point, I succeeded in proving within the framework of the orthodox theory, that it is not true that wages are normally equal to the value of the marginal product of labour.

All this had no effect. Perfect competition, supply and demand, consumer's sovereignty and marginal products still reign supreme in orthodox teaching. Let us hope that a new generation of students, after forty years, will find in this book what I intended to mean by it.

CAMBRIDGE Jarw,cwy 1969

JOAN ROBINSON

FOREWORD

BEsiDES a restatement of current ideas on economic theory, thi8 book contains some matter which I believe to be new. Of not all the new ideas, however, can I definitely say that "this is my own invention". In particular I have had the constant assistance of Mr. R. F. Kahn. The whole technical apparatus was built up with his aid, and many of the major problems­notably the problems of Price Discrimination and of Exploita­tion-were solved as mueh by him as by me. He has also con­tributed a number of mathematical proofs which I should have been incapable of finding for myself. In general I have en­deavoured to build on the foundations laid by Marshall and by Professor Pigou. This is a debt which all economists owe, and which may be taken for granted. I have for the most part re­ferred to their works only where I believe that I have detected them in errors of detail.

Of more recent work, my chief debt is to Mr. Piero Sraffa's article in theEconomicJournalof December 1926, to Mr. E. A. G. Robinson's Structure of Competitive Industry, and to Mr. G. F. Shove's articles in the Economic Journal of June 1928 and March 1930. Mr. Sraffa's article must be regarded as the fount from which my work flows, for the chief aim of this book is to attempt to carry out his pregnant suggestion that the whole theory of value should be treated in terms of monopoly analysis. Mr. Robinson's work on the optimum size of firms is the founda­tion of my treatment of competitive equilibrium, and plays an important part in the Appendix on Increasing and Diminish­ing Returns. Mr. Shove's articles form the basis of my treat­ment of rent and of the four cost curves. But a reader who is

xiii

xiv ECONOMICS OF IMPERFECT COMPETITION

acquainted only with those articles would very much under­estimate my debt to him, for his teaching in Cambridge for many years past has influenced directly and indirectly the whole approach to many problems of economic analysis. The more specific points that I have derived from Mr. Shove are acknowledged as they occur, but my indebtedness to him must not be regarded as being confined to those points.

A moment has been reached in the development of economic theory when certain definite problems require to be solved, and many writers are at work upon them independently. There are many occasions, therefore, when several explorers are surprised, and somewhat pained, on meeting each other at the Pole. Of such an occasion tlie history of the ''marginal revenue curve" presents a striking example. This piece of apparatus plays a great part in my work, and my book arose out of the attempt to apply it to various problems, but I was not myself one of the many explorers who arrived in rapid succession at this particular Pole. I first learnt of it from Mr. C. H. P. Gifford, of Magdalene College, who was then reading for the Economics Tripos. Shortly afterwards Mr. P. A. Sloan, of Clare College, showed me an unpublished essay in which it occurred. Next it was pub­lished by Mr. R. F. Harrod in the Economic Journal of June 1930, in an article which must have been written almost simultaneously with Mr. Sloan's paper. In a. later article (Economic Journal, December 1931) Mr. Harrod set out in an analytical form some of the relations between marginal and average curves which I had discovered by geometry. At this Pole I can claim to have arrived by a. route of my own, but his analytical formulation of the fundamental relation between average and marginal value has been of very great service to me since it appeared. Meanwhile a number of explorers were added to the rapidly growing crowd at the Marginal Revenue Pole. ProfessorT. 0. Yntema. (who also anticipated Mr. Harrod's formula for the relation of average to marginal value) had,

FOREWORD XV

unknown to me, arrived there long before (Journal of Political Economy, December 1928). Dr. E. Schneider, Dr. H. v. Stackel­berg, and Professor Mehta, amongst many others, appear •to have discovered it independently. Even the naming of this concept presented a minor coinciden~. I was dissatisfied with Mr. Gifford's and Mr. Harrod's titles for it, and it was christened for me by Mr. Robinson as "marginal revenue" some time before Professor Viner published an article (in the Zeitschrijt fur Nationalokonomie, September 1931) in which he refers to it by the same name.

The conception of "elasticity of substitution" provides another example of this kind of coincidence, for Mr. J. R. Hicks published his formulation of it in his Theory of Wages some time after I had first made use of it. When Mr. Hicks's book appeared my work on the analysis of wages was almost completed, but a study of one of his results led me to remove an error from my argument. In this part of the field my chief debt is to Mr. D. H. Robertson's illuminating article on "Wage Grumbles" (Economic Fragments).

A number of writers have recently been evolving methods for dealing with monopoly problems which are at some points similar to my own. Dr. Schneider and Dr. v. Stackelberg have published one or two items which occur in my tool-box. But in my opinion their work is marred by the use of pnnecessarily complicated mathematical analysis where simple geometrical methods would serve. I am, however, indebted to Dr. Zeuthen's book on Problems of Monopoly. He makes use only of Marshall's "areas" technique, but I discovered at least one important proposition in the course of restating some of his results in "marginal" terms. Professor Chamberlin's Theory of Mono­polistic Competition provides a plentiful crop of coincidences, but it appeared too late for me to notice them in detail.

There are probably other explorers in the field with whose progress I am unacquainted. If my results are anywhere found to be the same as those of some other writer to whom no

xvi ECONOMICS OF IMPERFECT COMPETITION

reference is made, it must be understood either that my fellow-explorer is unknown to me, or that his work was pub­lished when mine was already completed. But wherever possible I have mentioned the names of the explorers whom I found already at the Pole when I arrived there.

Mr. C. W. Guillebaud was kind enough to read my manu­script and made many helpful suggestions. Finally, in addition to his constructive suggestions, I have had the benefit of Mr. Kahn's criticism at every stage of the work from its inception. For this the reader, as well as myself, must be grateful to him, for he has weeded innumerable errors from my pages.

Some passages in Chapter 7 are taken (with a few alterations) from an article in the Economic Journal, December 1932, and are here used with the permission of the Editor.

"'JAMBBIDGE October 1932

JOAN ROBINSON

CONTENTS

l'BEJrAOE ro !l'BE SEcoND EDITION

FOREWORD

lNTRODUoriON

THE AssUKPTIONS

THE GEOKETRY •

BOOK I THE TECHNIQUE

CHAPTER 1

CHAPTER 2

BOOK II MONOPOLY EQUILIBRIUM

CHAPTER 3 MoNOPOLY EQUILIBRIUM

CHAPTER 4 CHANGES IN DEKAND •

CHAPTER 5 CHANGES IN Co8'JI

BOOK III COMPETITIVE EQUILIBRIUM

CHAPTER 6 THE SUPPLY CuBv11: •

PAGE v

• xiii

1

15

26

47

60

76

xviii ECONOMICS OF IMPERFECT COMPETITION

CHAPTER 7 PAGJI

COMPETITIVE EQUILIBRIUM 92

CHAPTER 8

A DIGRESSION ON RENT 102

CHAPTER 9

THE SUPPLY CURVE UNDER PERFECT COMPETITION 120

BOOK IV

THE COMPARISON OF MONOPOLY AND COMPETITIVE OUTPUT

CHAPTER 10

A DIGRESSION ON THE FOUR CosT CURVES • 133

CHAPTER 11

COMPARISONS OF MoNOPOLY AND COMPETITIVE OUTPUT. 143

CHAPTER 12

COMMENTARY ON THE COMPARISONS

CHAPTER 13

CoNTROL OF MoNOPOLY PRICE

CHAPTER 14

OBJECTIONS TO THE COMPARISONS •

BOOK V

PRICE DISCRIMINATION

CHAP'l'ER 16

PRICE DISCR:rtdiNATION

CHAPTER 16

THE MORAL o-, P:aiCE DISCRIMINATION

. 155

• 159

• 166

• 17!)

. 203

CONTENTS

BOOK VI

MONOPSONY

CHAPTER 17

A DIGRESSION ON THE BUYER

CHAPTER 18

MONOPSONY

CHAPTER 19

PAGB 211

• 218

RELATIONSHIP OJ' MONOPSONY AND MONOPOLY TO PERHOT COM·

PETITION 229

BOOK VII

THE DEMAND FOR A FACTOR OF PRODUCTION

CHAPTER 20

A DIGRESSION ON MARGINAL NET PRODUCTIVITY • 235

CHAPTER 21

THE DEMAND J'OR LABOUR OF THE INDIVIDUAL EMPLOYER • 243

CHAPTER 22

THE DEMAND CURVE FOR LABOUK OF AN INDUSTRY • 253

BOOK VIII

THE COMPARISON OF MONOPOLY AND COMPETITIVE DEMAND FOR LABOUR

CHAPTER 23

COMPARISONS OF MONOPOLY AND COMPETITIVE DEMAND J'OR

LABOUR 267

CHAPTER 24:

CoRRECTION OF THE CoMPARIJ:>ONS • • 273

xx ECONOMICS OF IMPERFECT COMPETITION

BOOK IX

EXPLOITATION

CHAPTER 25

MONOPOLISTIC EXPLOITATION OF LABOUR •

CHAPTER 26

MONOPSONISTIC EXPLOITATION OF LABOUR

BOOK X

A WORLD OF MONOPOLIES

CHAPTER 27

A WoRLD OF MoNOPOLIES

CONCLUSION

APPENDIX

INCREASING AND DIMINISHING RETURNS ,

PA.GK

• 281

292

307

327

• 329

• 349