My take on competition and market structures, for college economic topics. It has always bothered me that the most-discussed market structures, monopoly and perfect competition, are those least found in the real world, where monopolistic competition and oligopoly prevail.
Given a choice (which I don’t always have) when I teach market structures I start with monopolistic competition, then move to oligopoly and finally say oh by the way there are these other two called perfect competition and monopoly.
Perhaps it can be said that a market is a complex system, that is, a market is a system composed of many components which may interact with each other. The descriptive task of categorizing markets employs reductionist methods that produce tautologies.
Reading a post by Judith Curry this morning, I was reminded of your work with epistemology and how market structure might be considered in that regard.
Curry writes that:
“Holism claims that complex systems are inherently irreducible and are more than the sum of their parts, owing to chaos and nonlinearities. Emergent behavior may arise from complex systems that cannot be deduced from consideration of the components of the system alone. Holism leads to “systems thinking” and possesses derivatives such as chaos and complexity. “
Economics, however, primarily uses reductionism. Curry writes:
“a reductionist approach, whereby a phenomenon’s complex nature is reduced into individual components that are assumed to work together to produce observed structures. Reductionism evolved from Rene Descartes’ “mechanical philosophy,” whereby the universe is thought of as a complicated machine made up of identifiable components. Essentially, reductionism aims to understand the nature of complex things by reducing them to the interactions of their parts, or to simpler or more fundamental components. This implies that a complex system is nothing but the sum of its parts.”
Rather than reject one or the other, Curry turns to Hofstader to look to the situational usefulness of each:
“The predictability of complex systems can be described using concepts introduced by Hofstadter (1980). Simply stated, system predictive skill depends on its degree of complexity. Three hierarchies of organization and disorganization are suggested: simple, complex, and tangled, where the simpler the complexity the greater the potential predictability. By extension, the more complex the system, the less predictability the system possesses.”
One wonders if market structures can usefully be considered within this framework.
Those aren’t Curry’s words. They are from chapter 19 (“Some Concluding Remarks”) of Peter Webster’s recently published Dynamics of the Tropical Atmosphere and Oceans. She helped edit the final drafts of the chapters and liked the book so much she reproduced that entire chapter.
Thank you for the correction. My bad.
Econ teachers need a theory of value added networks.
They can show that a consume product is really a purchase of a sequence of products in a single contract. Then, using ratios, the econ teacher can start to separate more complete markets from monopsony via the sequence length. Thus, we buy cars less often then we buy applesauce, the ratio of purchase rates related to sequence length.
I have always framed monopolistic competition as “normal competition” in classes. Cowen and Tabarrok’s book largely dispenses with perfect competition models, except in the chapters on monopoly etc. where they distinguish between perfectly flat and sloping demand curves. I am always tempted to cut that part out entirely, and only discuss flat curves in the sense that they never happen over all. Perfect competition models seem to do nothing but teach people the opposite of how things work, with no actual benefits associated.
I recently was speaking with other college level teachers who were surprised that I don’t teach it. When I asked what was the point their only response was that it lets you show the efficiency losses of monopoly. Yet 1) those losses are illusory because PC never obtains anyway and 2) you can demonstrate losses by using normal sloping curves anyway. The whole conversation underlined just how removed academic economists are from how economies actually work, instead being buried in the model of reality they were taught.
(They weren’t even old economists, being probably 25-35. Younger than me, anyway.)