IF THE FACTUAL REQUIREMENTS OF ‘PERFECT’ COMPETITION ARE ABSENT, IT IS NOT POSSIBLE TO MAKE FIRMS ACT ‘AS IF’ IT EXISTED
In the absence of the conditions of 'perfect' competition, firms cannot be expected to act as though such conditions exist. Competition depends on producers acting in their self-interest, using their unique knowledge to make decisions. When perfect competition is not present, producers may set prices above their marginal costs, which some critics believe is not acceptable. These critics argue that firms should operate as if they were in a state of perfect competition, but this ignores the reality of self-interest, which motivates producers to seek out and utilize unknown information.
Self-interest is essential for encouraging producers to improve their methods of production. Many advancements come from companies aiming for short-term profits; these profits allow them to reinvest in further improvements. If the costs of production were easily determined, it might make sense to require firms to sell at marginal costs. However, costs are not universally known or easily quantifiable; they often depend on a producer’s expectations about future developments. Decisions about whether to expand production depend on assessments of future pricing and costs.
The profits from improved techniques incentivize firms to invest in new equipment, which should only be done if there is a reasonable expectation that prices will exceed operating costs for a while. If firms are forced to reduce prices after achieving success, it undermines the motivation to take risks in the first place. Moreover, it is not unjust for producers to earn profits from their innovations and unique resources.
While market power can lead to monopolistic conditions, it's not necessarily a bad outcome of competition, especially if it results from efficiency rather than prevention of competition. Monopolies can effectively serve customers if they can produce at lower costs than others without blocking competitors from entering the market. Thus, if a producer can offer lower prices or better products, it’s acceptable for them to benefit from their competitive advantages as long as they are not preventing others from competing effectively. The essence of true competition is that it should allow individuals to succeed based on their unique attributes and capabilities.
In the absence of the conditions of 'perfect' competition, firms cannot be expected to act as though such conditions exist. Competition depends on producers acting in their self-interest, using their unique knowledge to make decisions. When perfect competition is not present, producers may set prices above their marginal costs, which some critics believe is not acceptable. These critics argue that firms should operate as if they were in a state of perfect competition, but this ignores the reality of self-interest, which motivates producers to seek out and utilize unknown information.
Self-interest is essential for encouraging producers to improve their methods of production. Many advancements come from companies aiming for short-term profits; these profits allow them to reinvest in further improvements. If the costs of production were easily determined, it might make sense to require firms to sell at marginal costs. However, costs are not universally known or easily quantifiable; they often depend on a producer’s expectations about future developments. Decisions about whether to expand production depend on assessments of future pricing and costs.
The profits from improved techniques incentivize firms to invest in new equipment, which should only be done if there is a reasonable expectation that prices will exceed operating costs for a while. If firms are forced to reduce prices after achieving success, it undermines the motivation to take risks in the first place. Moreover, it is not unjust for producers to earn profits from their innovations and unique resources.
While market power can lead to monopolistic conditions, it's not necessarily a bad outcome of competition, especially if it results from efficiency rather than prevention of competition. Monopolies can effectively serve customers if they can produce at lower costs than others without blocking competitors from entering the market. Thus, if a producer can offer lower prices or better products, it’s acceptable for them to benefit from their competitive advantages as long as they are not preventing others from competing effectively. The essence of true competition is that it should allow individuals to succeed based on their unique attributes and capabilities.