Kriss & Perfect Competition

“The single most important concept in the history of economic analysis is perfect competition” – Peter Cochrane    (Machovec 1995, p.1)

     Kriss holds the view that business competition is becoming more like the economic model of perfect competition. However, in this essay I will argue the case both for and against Kriss’s view that business competition is becoming more like the economic model of perfect competition while providing supporting evidence for both sides of this issue.

     There are a variety of definitions out there on what exactly the theory of perfect competition is. One such definition defines that the theory of perfect competition holds that “profit rates should fall to zero when consumers have perfect knowledge of the characteristics of products and the prices at which they are available” (Lycos, p.1).

     Perfect competition can also be defined as an economic model describing a hypothetical market form where no producer or consumer has the market power to influence prices. Accordingly, this perfect competition would then lead to a completely efficient outcome. (Wikipedia, p.1).

     Kriss states that “With the growth of on-line shopping, price comparison websites and falling prices for many consumer goods in recent years, I think business competition is becoming more like the economic model of perfect competition” (Kriss,).

     In supporting Kriss’s statement, I feel it is important to point out he is not stating that business competition has become the economic model of perfect competition, but that “business competition is becoming more like the economic model of perfect competition” (Kriss).

     This statement can be supported by the fact that “perfect competition” can become in reality much easier now with the Internet. More data can be easier obtained as negotiation advantages are shifting from the seller to the buyer in this electronic age. Companies can expect greater competition, increased commoditization along with a reduction in profit margins—hence, making a knowledge shift a power shift (Perfect, tutor, p.1).

     Years ago a colleague of the technology-driven business strategist Peter Cochrane stated, “The Internet would produce a world where if we wanted something we would just put a tender out on the net and then accept the lowest bidder” (Quinn, 2005, p.1) There are signs that this is what is happening now which can be used as another indicator of perfect competition.

     For competition to be defined as “perfect competition” by definition, there are five parameters to be fulfilled: atomicity, homogeneity, perfect and complete information, equal access and free entry (Machovec, 1997). The Internet is helping to make all of these parameters more and more a reality for today’s consumers.

     When a market is perfectly competitive there is productive efficiency and allocative efficiency both exist. An example of allocative efficiency would be when the price of an item is equal to the marginal cost. This makes the item available to the consumer at the lowest possible price.

     Kriss’s view can also be supported in that the closest thing to a perfectly competitive market would be a large auction of identical goods with all potential buyers and sellers present (perfect, tutor, p.1). Some examples today that could fit this “perfectly competitive market” would be eBay site, stock exchange and other areas of today’s business society resembling this type of business interaction. This would again support Kriss’s business competition and perfect competition beliefs.

     On the other hand, productive efficiency occurs when the item is produced at the lowest point of the average cost curve, which implies they cannot produce the goods any cheaper. This would occur in perfect competition. If one reads current business magazines, newspapers and the Internet, we could easily disagree with Kriss’s view that business competition is becoming perfect competition using this information as we see the large profits some of today’s firms, companies and corporations are making.

     In Frank Machovec’s book, Perfect competition and the transformation of economics, Machovec states that “the perfectly competitive model should more aptly be characterized as a mutation, for its genes bear little resemblance to those of its presumed parents” (Machovec 1997, p.1). To restate this in my own words, what Machovec is saying is that there may not be as great of a disagreement on Kriss’ statement as some might think because there are differences between how economists view, label, and interpret some of the same ideas. Throughout the text of Machovec’s book he would mention such things as “mainstream’s historical perspective” on perfect competition and the “classical and neo-classical perspective” on perfect competition. These terms can be used to strengthen the argument of the varieties and various interpretations of perfect competition.

     Therefore, it is possible that it can look to some as if the business market is becoming more like the economic model of perfect competition to some and not to others. Although it is impossible for a company in perfect competition to earn more money than is necessary to cover its economic cost in the long run, the profit has to be obvious to trigger other companies to enter the market thus counteracting that profit and driving the market price down. Like all things, business in general has an ebb and flow to it so things don’t occur rapidly to bring that perfect competition balance into the picture. Therefore, we may be viewing the process that brings it into perfect competition although perfect competition may be incomplete.

     For example, although the petroleum companies have been making large profits, concurrently there are more alternative energy sources today being experimented with then ever before in history even though the big picture doesn’t necessarily reflect that right now. However, it is reflected in different areas that will continue to grow because of the imperfect competition in our current energy sources that will only attract more competition to take the profit away from the oil companies in the future, so in the long run what happens could reflect a more perfect competition.

     One article stated that although the majority of markets are “imperfectly competitive” many markets are getting closer to being perfect competition where there are “enough sellers of products that are near perfect substitutes for each other” (Perfect, 2007, p.1).

     Many economists question the validity of even studying perfect competition because although they don’t deny the term itself exists, they don’t feel that perfect competition will ever be a reality. I feel it could be that having the word “perfect” as part of the terminology which leads some people to erroneously feel that it is to define a flawless competition rather than that which balances itself out.

     However, Naz makes an excellent point in that the large firms are dominating the markets and keeping out their rivals. The question bears to be asked, “Is the perfect competition going to be only among the large companies that can afford to stay afloat leaving only the perfect competitors to interact with one another? How can business competition become “perfect competition” when there is less and less competitors that can afford to survive and be a part of the remaining competition?

     Frank Machovec contends that models of perfect competition do not and cannot adequately account for the characteristic features of competition in the real world. Machovec feels that formal models that are used in these theories are too limiting to transfer the information to real life (Gordon, 1997, p.1).

     The more one reads on the subject of perfect competition, the broader and more diverse one can describe this term. However, one can see this concept from different viewpoints. Some regard this concept as unrealistic whereas others feel certain the time of perfect competition is now.

     In my final analysis of this topic, the statement which Kriss makes in that “business competition is becoming more like the economic model of perfect competition” can be both agreed with and disagreed with depending upon many individual factors, viewpoints and interpretations.

References:

Cochrane, P. “The single most important concept…” Perfect competition and the

     Transformation of economics. London, Routledge.

Egger, J. 1996, “Book Reviews: perfect competition and the transformation  of

     economics,” The Cato Journal, [Online] Available at http://www.cato.org

Gordon, D. “The Mises Review: Perfect competition and the transformation of

     economics” [Online] Available at http://www.mises.org/misesreview

Machovec, F. M. 1995. Perfect competition and the transformation of economics.

     London, Routledge.

“Perfect competition.” 2007, March 22. In Wikipedia, The Free Encyclopedia. Retrieved

     March 22, 2007, from http://en.wikipedia.org/wiki/Wikipedia

“Perfect competition.” 2007. Barron’s Investopedia. Available at:

     http://www.answers.com/topic/perfect-competition

“Perfect Competition,” Viewed 22 March 2007,

     http://www.econmodel.com/classic/ucost1.htm

Quinn, D. 2005, “Peter Cochrane’s Blog:Accelerating society,” Available at

     http://hardware.silicon.com