What If Production Character Rather Than Cost Had Been Economists’ Primary Object Of Explanation?

From Cafe Hayek, Jan 20:

What follows is a speculative discourse on the economical analysis of competition.  It’s a discourse that I believe I made inwards an before post – but, if I did brand it, I cannot instantly uncovering it.  So, for the tape I brand it again.  It’s wonky, it might live on wrong inwards its details, in addition to it’s below the fold.


Imagining an Alternative Model of Perfect Competition
Economic competition, from the standpoint of each supplier, is an economical reality amongst which he or she must deal inwards guild to accomplish the ultimate destination of each supplier qua supplier – namely, to increase every bit much every bit possible his or her firm’s internet acquaint value.  Absent particular privileges, each supplier inwards a competitive marketplace position attempts to accomplish this destination past times adjusting its operations on several margins.  Cutting prices to attract to a greater extent than buyers is only i such competitive move.  Improving production character is another.  Lowering per-unit costs of production in addition to distribution is yet another.

In neoclassical mainstream economics, however, toll contest is treated every bit if it is the only, or, certainly, the paramount cast of competition.  This obsession amongst toll contest is unwarranted.  While I stand upwards 2nd to no i inwards my appreciation of the indisputably cardinal in addition to vital purpose that market-determined prices play inwards a marketplace position economy, it is an mistake to suppose that toll contest is the only, the paramount, or alone the best cast of competition.

Of course of didactics it’s truthful that consumers desire to pay every bit depression a toll every bit possible for a unit of measurement of whatever given skillful or service.  For the real same reason, consumers desire to larn every bit much quality every bit possible inwards that skillful or service for whatever given toll at which that skillful or service is available for sale.

When consumers deed to “maximize their utility” or to “get skillful bargains” – telephone band it what you lot volition – prices are non all that thing to them.  If prices were all that matter, thus fifty-fifty billionaires would eat only ramen-noodle dishes, have on only inexpensive second-hand clothing, in addition to don only Timexes in addition to never Rolexes.

So suppose that economists had formulated the theory of perfect contest differently.  Suppose that, instead of assuming exogenously given in addition to fixed goods in addition to services (of given qualities) inwards guild to meet how contest affects the prices of goods in addition to services, economists had assumed that the prices of dissimilar types of goods in addition to services are exogenously given in addition to fixed inwards guild to meet how contest affects the types in addition to quality of goods in addition to services made available on market.

In this Alternative Model of Perfect Competition, economists would explicate that, inwards a ‘perfectly competitive’ industry, each draw of piece of occupation solid is a “product-quality taker.”  At each 2nd inwards time, each draw of piece of occupation solid could sell every bit many units per menstruum every bit it wished without improving its product’s quality, in addition to would lose all sales if it lowered its production character past times fifty-fifty the tiniest amount.  As inwards the actual, familiar model of perfect competition, each firm’s only “choice” inwards the Alternative Model is the quantity to produce.  Each draw of piece of occupation solid would arrive at that quantity of output at which marginal cost equals price.

Remember, inwards this Alternative Model of Perfect Competition, toll never changes.  As amongst production character inwards the actual, criterion model of perfect competition, inwards this Alternative Model, toll throughout remains exogenously given in addition to fixed....MORE