The competitive process is fundamental in economics, although it is extremely difficult to define under a universal definition due to the various views laid down by different theories. While the standard theory concentrates on market structure and strategic behaviour, the Austrian School focuses on market dynamics and entrepreneurship whilst the post- Keynesian school directs its attention to the areas surrounding dominant firms and administered prices. This essay will attempt to compare and contrast Austrian and post-Keynesian criticism of the standard neoclassical view of the competitive process.
‘The neoclassical theory of the firm considers four main theoretical market structures: ...view middle of the document...
Monopoly is a market structure with a single firm, producing a unique product, which is protected from competition by entry barriers. Monopolistic competition is another market structure where a large number of firms produce similar products with free entry to the market, falling between perfect competition and monopoly. Oligopoly is a market structure with a small number of firms, with products either identical or differentiated, with barriers to entry with firms recognising their interdependence.
In Addition to the Austrian and neoclassical schools, another critic of the standard theory is post-Keynesian theory, interpreted from the work of John Maynard Keynes, becoming prominent in the 1960’s. Post- Keynesianism is related with uncertainty to macroeconomic problems. In the post-Keynesian theory, oligopoly is seen as the regular state of affairs in the majority of markets, where firms compete on dominance.
In neoclassical theory, the key notion of competitive markets involving price-taking firms is the basic conception of competitiveness, basing competition on the idea that consumers are able to maximize utility and firms can maximize their profits. There is full and relevant information, allowing people to act independently. In the market process firms produce as efficiently as the current state of technology allows at the equilibrium point where price equals marginal cost, allowing for normal profit in the long run. (Sawyer, 1990)
The Austrian school of thought has strong criticisms against the neoclassical price theory. Kirzner (1973) argued that ‘the focus of attention, on the task of price theory, is thus on the values of the price and quantity variables, and in particular on the set of values consistent with equilibrium conditions.’ (Kirzner, 1973, p. 5.) Price theory is fundamental in standard theory, involving, ‘a market system the activities of market participants insist of choosing the quantities and qualities of commodities and factors to be bought and sold and the prices at which these transactions are to be carried out.’ (Kirzner, 1973, p. 4.) This describes the approach of the neoclassical school with examines the associated pattern of equilibrium price, cost and output.
The Austrian school of thought bases its ideology on entrepreneurial rivalry. The Austrian school criticises the neoclassical view on price theory and argues that ‘price theory helps understand how the decisions of individual participants in the market interact to generate the market forces which compete changes in prices, in output, and in methods of production and the allocation of resources.’ (Kirzner, 1973, p. 6.) Kirzner (1973, p. 6.) goes on to say that ‘the efficiency of the price system, does not depend upon the optimality of the resource allocation pattern at equilibrium; rather, it depends on the degree of success with which market forces can be relied upon to generate spontaneous corrections in the allocation patterns prevailing at times of...