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Published online by Cambridge University Press: 07 November 2014
In the present stage of development of economic theory there is found even at the most elementary level a general theory for pure competition, for monopolistic competition, and for monopoly, but there is not to be found anywhere a general theory of oligopoly or circularity. Thus, there is a general theory for all branches of the modern classification of types of competition except one branch, namely, oligopoly. The explanation given for the absence is that a rival's possible reactions to price or output alterations by some particular firm are unlimited in number; there are indeed many oligopoly or circularity theories—a theory for each of many sets of specific assumptions.
It is not the purpose of this essay to set forth a general theory of oligopoly, but rather to move in the direction of a general classification of forms of competition. An attempt is made to retain one special characteristic of Professor Chamberlin's work viz., that of proceeding by degrees from one extreme to another, a characteristic Professor Chamberlin achieved with his “number of firms” and “degree of product differentiation.” At the same time it is attempted to break up oligopoly situations; thus, for example, “leadership oligopoly” is as distinct from “collusive oligopoly” as it is from pure competition, or as monopolistic competition is from pure competition.
The author would like to thank Professor G. A. Elliott, of the University of Toronto, for his patient criticisms and generous direction.
1 Many economists have realized the existence of the problems. For a brief discussion of the first see Fellner, W., Competition among the Few (New York, 1949), pp. 47–8Google Scholar; and of the second, Machlup, F., The Economics of Sellers' Competition (Baltimore, Md., 1952), pp. 506–8.Google Scholar Fellner calls the first “quasi-oligopoly,” and Machlup calls the second “hyper-competitive oligopoly.”
2 Chamberlin, E. H., The Theory of Monopolistic Competition (Cambridge, Mass., 1942), 4th ed.Google Scholar; and Triffin, R., Monopolistic Competition and General Equilibrium Theory (Cambridge, Mass., 1940).Google Scholar Hereafter, page references for remarks or quotations are given in the text of this article.
3 The possibility labelled “quasi-oligopoly” in Figure 1 is discussed in section II. It is the case where the presence of competitors affects the policy of each firm even though there are no inter-firm effects; an example would be an organized group of farmers.
4 Professor Chamberlin spoke of “direct” and “indirect” “effects” and “influences,” as well as of the “total” effect. By direct effect he meant the effect of firm A's actions on the price of its product, and by indirect effect the fact that a rival's policy is not a datum, but is determined in part by A's own policy; when a firm takes into account both direct and indirect effects, it is said to consider its “total influence.” (Chamberlin, pp. 31–2).
5 In terms of Figure 2, Professor Chamberlin's indirect consequences (or indirect effects) mean: Initial Effect plus Initial Reaction plus Reflected Effect plus Reflected Reaction. For Dr. Triffin: “… ‘indirect’ influence … rivals ‘reactions’ induced by … price-output decisions” (Triffin, p. 76), that is, Initial Effect plus Initial Reaction. (Also cf. Chamberlin, p. 70).
6 It may happen in some instances that one firm is able to select the price or output for another firm, that is, a case of leadership-followership may exist. In this case, while there is an effect from firm A to firm B there is no reflected reaction; and TrifEn is pushed into the position of not classifying the leadership oligopoly theories as part of the “circularity problem.” This may not be regarded as an undesirable position, but is another difference between “oligopoly” and “circularity.”
7 If they are “taken into account” the firm does not act as if they did not exist, that is, the firm does not ignore them. It might be that a firm considers the reflected effects and decides to ignore them; a firm may ignore them, but may not be ignorant that they exist.
8 Triffin omitted this aspect (see Triffin, p. 62), but Professor Kaldor has emphasized it: “… people's subjective estimates of their situation (apart from their actual situation) constitute one of the independent determinants of equilibrium. Recent work in the theory of duopoly has also made it clear that the baffling question can only be satisfactorily treated by explicitly allowing for the entrepreneur's estimate of his rival's reactions, as distinct from the actual reaction itself.” Kaldor, N., “Mrs. Robinson's Economics of Imperfect Competition,” Economica, N.S., I, no. 3, 08, 1934, p. 341 Google Scholar, italics added.
9 Actually, the reflected effect (for example) objectively approaches zero or inclines away from zero, only reaching zero in the limiting case. The following classification uses the symbol “→”, it being understood that this means the reflected effect (for example) objectively tends toward zero, approximating zero as the limiting case is approached; if the effect does not tend toward zero, the expression ≠ 0 is used.