Is Competition Good
Review of Industrial Organization 19: 37–48, 2001. © 2001 Kluwer Academic Publishers. Printed in the Netherlands.
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Is Competition Such a Good Thing? Static Efficiency versus Dynamic Efficiency
MARK BLAUG
University of Amsterdam, Amsterdam, The Netherlands
Abstract. This paper addresses the rationale for antitrust legislation. It is a striking fact that the legitimacy of antitrust law has been taken for granted in the United States ever since the Sherman Act of 1890 and, until the advent of the so-called Chicago School, it was even taken for granted by conservative American economists. Europeans, on the other hand, have always been lukewarm about legal action against trusts and cartels and this attitude is found right across the political spectrum in most European countries. Nevertheless, in both the U.S.A. and Europe, the ultimate justification for antitrust law derives from economic doctrine regarding the beneficial effects of competition. But what exactly are these beneficial effects and how secure is the contention of economists that competition is always superior to monopoly? Surprisingly enough, competition, that central concept of economics, is widely misunderstood by many economists, both as a market phenomenon and as an organizing principle of economic reasoning.
I. A Little History of Thought I begin by drawing what I believe is a fundamental distinction in the history of economics, as far back as Adam Smith or even William Petty, between two different notions of what is meant by competition, namely, competition as an end-state of rest in the rivalry between buyers and sellers and competition as a process of rivalry that may or may not terminate in an end-state. In the end-state conception of equilibrium, the focus of attention is on the nature of the equilibrium state in which the contest between transacting agents is finally resolved; if there is recognition of change at all, it is change in the sense of a new stationary equilibrium of
37
Is Competition Such a Good Thing? Static Efficiency versus Dynamic Efficiency
MARK BLAUG
University of Amsterdam, Amsterdam, The Netherlands
Abstract. This paper addresses the rationale for antitrust legislation. It is a striking fact that the legitimacy of antitrust law has been taken for granted in the United States ever since the Sherman Act of 1890 and, until the advent of the so-called Chicago School, it was even taken for granted by conservative American economists. Europeans, on the other hand, have always been lukewarm about legal action against trusts and cartels and this attitude is found right across the political spectrum in most European countries. Nevertheless, in both the U.S.A. and Europe, the ultimate justification for antitrust law derives from economic doctrine regarding the beneficial effects of competition. But what exactly are these beneficial effects and how secure is the contention of economists that competition is always superior to monopoly? Surprisingly enough, competition, that central concept of economics, is widely misunderstood by many economists, both as a market phenomenon and as an organizing principle of economic reasoning.
I. A Little History of Thought I begin by drawing what I believe is a fundamental distinction in the history of economics, as far back as Adam Smith or even William Petty, between two different notions of what is meant by competition, namely, competition as an end-state of rest in the rivalry between buyers and sellers and competition as a process of rivalry that may or may not terminate in an end-state. In the end-state conception of equilibrium, the focus of attention is on the nature of the equilibrium state in which the contest between transacting agents is finally resolved; if there is recognition of change at all, it is change in the sense of a new stationary equilibrium of
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