Joan Robinson (1903-1983)
Leader in the Theory of "Imperfect Competition'
Photo: courtesy Girton College, Cambridge
Joan Robinson taught economics at England's Cambridge University for more than 40 years. Her book, The Economics of Imperfect Competition (1933), led her to be recognized as one of the world's foremost economists.
Taking their cue from Alfred Marshall, economists of the 1930's based their theories on the concepts of perfect competition and monopoly. But perfect competition, with its many buyers and sellers, all of whom had perfect knowledge of market conditions, rarely occurred. Neither, for that matter, did perfect monopoly, wherein buyers, unable to find substitutes, paid a price selected by the monopolist. What usually happened was something in between the extremes of perfect competition and monopoly. Professor Robinson referred to this kind of trade as imperfect competition.
Robinson's imperfect competition described markets in which sellers had more freedom to determine prices than they have under perfect competition, but less than they have under pure monopoly. They had this freedom either because their products were sold under conditions of monopolistic competition, or oligopoly.
Joan Robinson regarded imperfect competition as a major weakness of capitalism. By commanding a higher price than they might have under perfect competition, she said, businesses earn higher returns, while consumers have to find ways to do with less. Meanwhile, the economy operates at levels under its capacity to employ workers and produce goods and services. Conditions of underproduction and unemployment, she concluded, inevitably lead to periodic recessions and political unrest.
Legal Monopolies
Although monopolies are generally illegal in this country, the law does provide for a variety oflegal monopolies such as public utilities, patents, copyrights andtrademarks.
Public Utilities are privately owned firms that provide an essential public service. They are granted a monopoly because it is felt that competition would be harmful to the public interest. Your local electric, gas and water companies are public utilities. Utilities are subject to extensive government regulation and supervision.
Imagine the complications if more than one electric company served your community. Each would have its own power lines, maintenance organization and generating plant.
Competition, however, provides businesses with the incentive to keep prices down and improve services. In place of competition, government protects the public by regulating the activities of the utilities. Government supervision is carried out by regulatory commissions which determine the services the utilities provide and how much they are permitted to charge for them.
Patents as Monopolies.How would you like to come up with a new idea — something that could be turned into a new product or service that would make you rich and famous? To encourage you, the federal government grants patents to cover new products and processes. In a sense, a patent is a monopoly.
Erno Rubik, a teacher of architecture and design at the School of Commercial Artists in Budapest, has a world-wide monopoly on the puzzle which bears his name. Mr. Rubik has licensed the Ideal Toy Corporation and other firms to manufacture and market the now famous cube
The patent gives the inventor exclusive use of a new product or idea for 17 years. You may sell your idea or give it away, but it is yours to do with as you wish. Eventually, someone will develop a product or service that will be an acceptable alternative to yours. It, too, might qualify for a patent and perhaps compete with yours.
Copyright and Trademark as Monopolies. Through the Federal Copyright Office, the government gives the authors of original writing and artistic work acopyright— the exclusive right to sell or reproduce their works. That copyright is a special monopoly for the lifetime of the author plus fifty years.
Trademarks are special designs, names or symbols that identify a product, service or company. "Coke" is a trademark of the Coca-Cola Company. Competitors are forbidden from using registered trademarks or ones that look so much like trademarks consumers will confuse them with the originals.
How Competition Benefits Us All
In a competitive market, producers constantly strive to reduce their production costs as a way to increase profits. The increased efficiency that allows them to reduce their costs also enables producers to sell their goods at a lower price. Thus, by promoting efficiency, competition leads to lower prices.
Competition also motivates producers to improve the quality and increase the variety of goods and services. Consumers soon learn which brand offers the best value, and that firm will earn greater profits than its competitors. Similarly, producers in a competitive market must constantly look for new and attractive goods and services to win a larger share of the market.
As firms compete for the consumer's dollar in a market, their efforts lead to the production of a variety of better-quality products at the lowest possible prices. And since we are all consumers, it follows that competition benefits us all.
Federal Regulation: The Antitrust Laws
The American free enterprise system is based on the belief that competition is in the best interest of everyone. When competitors agree to fix prices, rig bids or divide the market, the public loses the benefits of competition. The prices that result are artificially high. This is unfair to consumers who must pay more for the things they buy. It is also damaging to an economy that looks to the price system to signal what goods and services are in demand and the most cost-effective way of producing them.
For that reason, the federal government and many state governments have enacted legislation known asantitrust laws —laws designed to safeguard competition. The major federal antitrust laws are The Sherman Antitrust Act, the Clayton Act, the Federal Trade Commission Act, and the Celler Antimerger Act. Nevertheless, many businesses are naturally interested in growing and controlling as much of a market — or several markets — as possible. One way to accomplish this goal is through merger.
Antitrust Legislation
Sherman Antitrust Act, 1890. The Sherman Act made it illegal to create a monopoly or to enter into a conspiracy to create a monopoly or "restrain trade." This includes agreements to fix prices, rig bids, and allocate consumers. An unlawful monopoly exists when only one firm provides a product or service, not because its product or service is superior to others, but because it has somehow suppressed competition.
Sherman Act violations are treated as criminal felonies. Individual violators can be fined up to $250,000 and sentenced to up to 3 years in prison for each offense. Corporations can be fined up to $1 million for each offense.
Clayton Act, 1914. The Clayton Act is a civil statute in that it carries no criminal penalties. It prohibits certain business practices such as giving special rates to certain customers if it "lessened competition or tended to create a monopoly." One provision in the Act permits individuals injured by an antitrust violation to sue in federal court for three times their actual damages. Another allows state attorneys general to sue on behalf of consumers in their states.
Federal Trade Commission Act, 1914. The Federal Trade Commission Act created an agency, the Federal Trade Commission (FTC), to enforce the antitrust laws. In the Wheeler-Lea Act of 1938, the FTC was given the added responsibility of protecting the public against false or misleading advertising.
Celler-Kefauver Antimerger Act, 1950. As originally written, the Clayton Act only applied to "horizontal" mergers. The Celler-Kefauver Act amended the law by broadening it to include any merger that "lessened competition or tended to create a monopoly."
The Urge To Merge
How do some businesses grow to be worth hundreds of millions or even billions of dollars and large enough to control a market? Business firms expand in one of two ways, internally or externally. Firms that grow internally expand their activities by adding plant, equipment and personnel. Those that grow externally do so by acquiring other companies through "mergers.
A merger results when one corporation acquires the stock of another. Following the merger, the acquired firm is either dissolved or becomes a division of the combined, new firm The number of mergers in recent years has reached enormous proportions. In 1987 for example, over 2,000 former independent corporations were absorbed in the merger process.
Mergers take place for a number of reasons. Some companies buy others in order to "spread the risk" by adding new products to their business, others to get the benefits of increased size. Still others wish to reduce their costs by acquiring assets like marketing or transportation facilities. Some view mergers as a means of reducing or eliminating competition. In recent years, a number of mergers were arranged because the buyer hoped to profit from the subsequent re-sale of part or all the acquired firm.
Mergers fall into three categories: horizontal, vertical. conglomerate.
Horizontal Mergers. The combination (or "integrating") of two or more companies engaged in the same business is a horizontal merger. The combination of two or more book publishing firms would be an example of a horizontal merger or horizontal integration.
Vertical Mergers. The combination of two or more companies involved in different steps of the same production process is called a vertical merger or vertical integration. An example of a vertical merger would be an automobile manufacturer that acquired a steel mill to produce the steel it needed for automobiles.
Conglomerate Mergers. A conglomerate merger combines two or more unrelated businesses under a single management. Examples of conglomerate mergers include Liggett &Meyers,a cigarette manufacturer, merging with Alpo, the dog foodcompany. Similarly, General Mills, which markets breakfast cereals and other food products, also owns Izod Lacoste Clothing, Lark Luggage, and Parker Brothers, the game company.
Some businesses have become more efficient and a profitable as a result of recent mergers, but some consumers wonder if these mergers are reducing the level of competition in the marketplace..
Summary
Market structure refers to the number and relative power of the buyers and sellers in a market. The structure of markets ranges from perfect competition, in which there are many buyers and sellers, through monopolistic competition, oligopoly, and finally monopoly, in which there is only one seller.
Although monopolies are generally prohibited by law, there are a certain number of legal monopolies. These include public utilities and business operations protected by patents and copyrights.
Most business in the United States is conducted under conditions of imperfect competition. Imperfect competition includes both monopolistic competition and oligopoly. In monopolistic competition many sellers provide consumers with a variety of similar products each with their own unique characteristics. In an oligopoly, a few large firms control the market for particular goods and services.
Federal legislation in the form of antitrust laws seeks to promote competition and prevent the restraint of trade. The most important of these laws are the Sherman Act, the Clayton Act, the Federal Trade Commission Act, and the Celler Antimerger Act. Nevertheless, many firms grow very large through mergers. Horizontal mergers unite similar businesses; vertical mergers join related businesses like steel, coal and automobile companies. Conglomerate mergers bring businesses from different industries together.