Abstract
A crucial objective in industrial organization is to evaluate whether or not imperfectly competitive markets perform well from society’s perspective. As we discussed in Chap. 1, we focus on three dimensions of market performance: static efficiency, dynamic efficiency, and equity. Up to this point, we have spent most of our time discussing efficiency issues. We now begin this chapter with a review and assessment of what we have learned regarding imperfect competition and different types of inefficiency—market power (i.e., allocative inefficiency), X-inefficiency, rent-seeking behavior, and technological change (i.e., dynamic efficiency).
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Notes
- 1.
In other words, a firm is technically efficient when operating anywhere on its isoquant and is economically efficient when operating at a point where its isocost function is tangent to its isoquant (Varian, Chap. 20).
- 2.
Recall that economic efficiency need not imply productive efficiency. In a duopoly market with two economically efficient firms, for example, firm 1 may produce in the region of scale economies and firm 2 in the region of scale diseconomies. This is not productively efficient, because industry costs would be lower if firm 1 were to increase production and firm 2 were to decrease production.
- 3.
There are imperfectly competitive models that also produce allocatively efficient outcomes, but only under very restrictive conditions. For instance, the Bertrand and Cournot–Bertrand models produce the competitive outcome when products are homogeneous, there are constant returns to scale, and firms are symmetric [see Chap. 10 and C. Tremblay and V. Tremblay (2011a)]. Another example is the perfectly contestable market (Baumol et al., 1982), which assumes that sunk costs of entry are zero and entry is instantaneous (see Chap. 5).
- 4.
One could view this as a simple transfer from monopolies to politicians. Nevertheless, rent-seeking behavior is costly and may increase market power, which raises the deadweight loss associated with monopoly.
- 5.
Unfortunately, the empirical evidence does not always distinguish between X-inefficiency and other types of inefficiency. For a survey of the evidence on X-inefficiency, see Frantz (1997). For a discussion of the methods used to distinguish among these various types of inefficiency, see Färe et al. (1985, 2008).
- 6.
For further discussion of inefficiency that has two components, one due to bad luck and the other due to systematic error, see Schmidt (1985–1986) and Greene (2008).
- 7.
If a firm had perfect foresight and could always correctly anticipate fluctuations in demand, an efficient firm would never have too much or too little inventory or productive capacity.
- 8.
Recall that an increase in technological opportunities means that there are greater expected benefits from investing in research and development.
- 9.
This can be devastating financially to displaced workers. In the long run, unemployment will be mitigated for the economy as a whole but not necessarily for the individual. And, as John Maynard Keynes said, “we are all dead in the long run.”
- 10.
- 11.
EconLit is the American Economic Association’s search engine for publications in economics.
- 12.
Recall from Chap. 1 that positive economics refers to the study of “what is” as opposed to normative economics which is the study of “what ought to be”.
- 13.
One can think of the needs and just-deserts principles as being elements for the “golden rule”—do unto others as you would have them do unto you. According to Flew (1979), the golden rule has roots in a wide range of cultures and religions. For example, Jesus (Matthew 7:12) is quoted as saying, “always treat others as you would like them to treat you.” The needs principle is consistent with Karl Marx (1875) who wrote “from each according to his ability, to each according to his needs,” which was first proclaimed by Louis Blanc, a utopian socialist (Capaldi 2004). This is also consistent with St. Paul (Acts 2: 44–45) who wrote that “the faithful all lived together… and shared out the proceeds according to what each one needed.”
- 14.
- 15.
Attitudes about justice are dependent on how a problem is framed and whether an outcome is reached by just means.
- 16.
Of course, virtuous behavior can be a good thing in and of itself. Socrates said that his virtuous behavior was ultimately self-interested, as it was “for the good of his soul” (Solomon, 2008, 24).
- 17.
For a more recent critique of business behavior, see Friedrichs (1996) and Mitchell (2001). The following Web page provides a list of dozens of consumer organizations: http://www.infoplease.com/ipa/A0002120.html, accessed July 12, 2011.
- 18.
For a complete account, see Birsch and Fielder (1994). The cost of fixing the problem was 12.5 million vehicles times $11, equaling $137 million. The expected benefit of fixing the problem was 180 saved lives valued at $200,000 each plus 180 saved burn injuries valued at $67,000 each plus 2,100 saved cars valued at $700 each, equaling $49.53 million. The value of a life was estimated to be $200,000 in 1970 by the National Highway Traffic Safety Administration. The US Department of Transportation estimated the value of a life to be $3 million in 2004 (Ashenfelter 2006).
- 19.
Bear Stearns was purchased by JPMorgan Chase in spring of 2008. For further discussion, see Thomas (2008) and The Economist (November 14, 2009).
- 20.
For a more complete review of this case, see http://www.ftc.gov/opa/2004/10/windowrock.shtm.
- 21.
For a more complete review of this case, see http://www.ftc.gov/opa/2010/11/pom.shtm.
- 22.
For a more complete review of this case, see http://www.ftc.gov/opa/2009/02/dutchman.shtm.
- 23.
This is a common remedy. In extreme cases, the FTC has ordered a company to spend 25% of its previous year’s ad budget on corrective advertising, which corrects the misinformation created by the false claim. In ITT Continental Baking Co., 79 FTC 248 (1971), the ITT Continental Baking Company marketed its Profile brand of bread as a diet bread. Although each slice of Profile was lower in calories than a slice of most other brands of bread, this is because it was sliced thinner. As a result of this deception, the FTC required ITT Continental Baking to use corrective ads to inform consumers that Profile is not a diet bread. See Pitofsky (1977) for further discussion and additional examples. These issues will be discussed more fully in Chap. 20.
- 24.
Buchanan (1986) identifies four determinants of income and wealth: effort, choice, luck, and birth.
- 25.
For a list of the richest 400 Americans in 2010, see Forbes, October 11, 2010 at http://www.forbes.com/wealth/forbes-400/list?page=1, accessed July 23, 2011.
- 26.
- 27.
Alternatively, one could argue that individuals may work hard to provide their children with an inheritance and should be free to do so in a society that values liberty.
- 28.
The Lorenz curve is a graph of the cumulative distribution function of income (wealth), with the vertical axis representing the cumulative share of people’s income (wealth) and the horizontal axis representing the cumulative share of people, who are ordered from lowest to highest income (wealth) levels. With an equal distribution of income (wealth), the Lorenz curve is a 45° line. With an unequal distribution, the Lorenz curve falls below the 45° line. The Gini coefficient is defined as the area between the 45° line and the Lorenz curve divided by the area under the 45° line. For a more complete discussion of the Lorenz curve and Gini coefficient, see Wolff (2009).
- 29.
- 30.
Similarly, Creedy and Dixon (1998) found that low-income households paid a larger share of the welfare loss due to monopoly power in Australia.
- 31.
These assumptions are designed to minimize the benefit that the wealthy receive from monopoly profits. Thus, the transfer of wealth due to market power to the wealthy is biased downwards.
- 32.
Hazlett and Siegfried (1997) find similar results for New Zealand.
- 33.
Another concern with inheritance taxes is that they apply to financial wealth and not inherited genes from parents. If it is fair to tax away all inheritance that is financial, it would also be fair to tax away inherited genetic gifts from parents. For example, Payton Manning and Eli Manning are successful quarterbacks in the NFL primarily because their father is Archie Manning, a former NFL quarterback. To tax away financial inheritance and not genetic inheritance would be unfair to financial inheritance recipients.
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Tremblay, V.J., Tremblay, C.H. (2012). Efficiency, Equity, and Corporate Responsibility in Imperfect Competition. In: New Perspectives on Industrial Organization. Springer Texts in Business and Economics. Springer, New York, NY. https://doi.org/10.1007/978-1-4614-3241-8_19
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