At this point, a word of caution is essential: although pure competition generally is referred to as the ultimate in competition, this does not mean that the intensity of rivalry among sellers in any other type of market is less. In fact, when there are a few dominant producers, as there are in cigarettes or automobiles, the interfirm rivalry may be considerably more severe than the rivalry between two wheat farmers in a more purely competitive market. It is important, accordingly, to keep in mind the distinction between kinds of competition and degrees of competition, and that the kind does not determine the degree.
Failure to make this distinction has caused a great deal of argument and misunderstanding between economists and businessmen to arise. It has been customary for the former to explain competition in such a way as to mean only pure competition. Any departures from this model are considered to be noncompetitive. The implication is clear: monopoly elements are present and rivalry between producers is nonexistent. The business world, faced by intense interfirm rivalry, reacts by describing the economist as living in an "ivory tower," and by pointing out that there is a significant amount of rivalry between oligopolistic and otherwise imperfectly competitive firms. Now, if it would be more generally recognized that there are different kinds of competition, that the degree of rivalry is not related to the kind, and that pure competition is only one kind of competition, there would be much less ground for controversy between entrepreneurs, economists, legislators, and jurists--especially when public policies toward competition are to be determined.
Price was our point of departure in the foregoing discussion of competition. By price competition we mean rivalry between two or more sellers, not bound together by any sort of agreement or collusion, who are buying or selling goods on the basis of price. Price competition may be orderly as well as vicious. If price competition is effective, the cutter may gain a market advantage for a duration dependent on the actions of his rivals. It is by means of price competition that demand and supply are equated. An excess of output over buying intentions should induce the seller to cut his price in order to effect an equilibrium. This type of price slashing tends to be of the orderly type. When the intent is to hurt rivals, the price-cutting action may become cutthroat and induce retaliation, which would result in market instability and disruption.
When the laws of supply and demand operate in an uncontrolled market, there will be one equilibrium price for all buyers regardless of the cost picture of the sellers. However, one would assume that the wares are homogeneous and that the market refers to a given time and place. The reasoning behind the one-price solution under such conditions is as follows: If a particular seller charges a higher price than his competitors, potential customers will shift to lowerprice sellers; hence, equilibrium will follow as the one group loses patronage and the other gains it. So long as a given market is being considered, prices of different sellers will tend toward equilibrium. The same sort of reasoning also prevents one seller from charging varying prices for the same goods among his own customers. If one buyer is charged a higher price in an uncontrolled market that gives him freedom to buy at any price, obviously he will seek to make his purchases at the lower prices. Such discrimination can exist only if there is some technique whereby the seller divides his market into a series of groups and sets up barriers that do not allow buyers to shift between the groups.
Market prices are set in such a way that there will be a mutual gain to both buyer and seller. The former gains through the satisfactions derived from his purchase; the latter gains from the use of purchasing power which he earns from the sale.
Still another type of competition--nonprice --attempts to attract customers through techniques other than price, such as service, packaging, credit, or quality. This description is true only to a certain degree; these nonprice elements do become cost factors to the seller. As such, they often may take the place of an otherwise possible price change. Moreover, it is not easy to calculate the true value of a nonprice action. If quality is doubled and price remains constant, the true effect is a 50 per cent price cut. But this is very difficult to measure. Businessmen may prefer nonprice competition because rivals find it more difficult to cope with, since its vagueness enables the seller to exploit its nature and appeal in a more general manner.
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