The Post Keynesian and Austrian Theories of Perfect and Imperfect Competition - Essay Example

Introduction Competition is a term that has a wide range of meanings depending on the field to which it is being referred (Kirzner, 2002). In the field of economics, competition is expressed in terms entrepreneurial rivalry and that is why the perfect type of competition is never considered a competitive behavior. This is because of the fact that the state of perfect competition leaves the situation of decreased average cost and increased returns (Lavoie, 1992). This means that increasing the demand of the products in the market will put some strain in the industries to increase production as far as the out is concerned. This kind of situation is what led to the researchers to conclude that perfect competition will never be a theory to analyze the increase in scale of returns (Hannagan, 2005). Competition refers to the process of disequilibrating the processes in the market for the firms to be able to take advantage of the resources in terms of market share and segmentation for the purposes of financial performances. Thus, the aim of this paper is compare and contrast Austrian and Post-Keynesian theories of the competitive process. The post Keynesian theory of perfect and imperfect competition The theory of perfect form of competition is said to assume that there is an aspect of full usage of resources meaning that there is no excess hence there is a market force that does not interferer with the market as far a the sellers and the buyers are concerned (Kirzner, 2002). This is unlike the imperfect competition, which is known to interfere greatly with the mechanisms of market by causing destabilization. This kind of competition is found in the monopolies and the oligopolies form of businesses, which generate excessive capacities (Lavoie, 1992). The theory of perfect competition is actually based on the symmetry or balance existing between the forces of supply and demand. This is whereby the prices in the market are smoothly driven together to an extent of being grouped together. The presentation of the demand and the supply curve in the perfect competition will be a curve that is made up of some intersecting curves (Hannagan, 2005). The perfect competition was also by a researcher called Harrod having homogeneity or rather some organized exchange as far as the products in the market are concerned (Lavoie, 1992). The demand too is very elastic in an infinite manner due to the great organization in the market of the products hence the production cost marginal looks exactly like the prices. The other aspect that was discovered was the issue of pure competition. This is characterized by perfect elastic demand of the output (Hannagan, 2005). The perfect competition and the pure competition slightly differ in the sense that the perfect form of competition is much deeper in that it has more conditions like the factors of mobility; there is no uncertainty and finally fluidity (Kirzner, 2002). In the aspects of economics, the perfect form of competition is associated with rational behaviors of the sellers and the buyers, full knowledge, absence of friction, perfect mobility, static conditions and the production factors are divisible. The above characteristic therefore expresses perfect competition as being the kind of a situation that puts a demand on the outputs of a seller in a perfect elasticity. According to the theory of perfect competition, the law of the diminishing returns is based on rental problems whereby the rise in the exploitation is because of less fertility in the land hence reducing marginal returns with reference to each unit input (Lavoie, 1992). According to post-Keynesian, commodity in this statement is considered not just as the agricultural output but also other complexes of diverse articles like the ironware and foodstuffs. This is why there is a consideration of differentiation of products so that the control of the industries supply can be well understood with reference to a single firm. Perfect divisibility is also used to define the perfect competition (Hannagan, 2005). This is whereby the absence of scale of economy will bring about the perfect completion because autonomy in the market forces will be present. The problem of defining the perfect competition in terms of the mainstream economic is that it does not clearly define the roles of the increasing returns the same way it does explain the role of the diminishing returns (Kirzner, 2002). This is because increasing returns is associated with the labor division. The role of the returns increasing was not explained as being the mechanism that will automatically result because of the firm becoming larger. In other word, the division of labor is due to the increase in productivity of the firm. According to the post-Keynesian in perfect competition, the production sources are not equivalent to optimum autonomously in demand state. This is whereby increase in the output will not result in the price influence but the particular firm will set its prices depending on the cost of production (Hannagan, 2005). Post-Keynesian theory also explains that adjustment in time cannot be a form of mainstream economics to explain or rather defines the operations of the diminishing returns (Kirzner, 2002). It explains that one of the constraints to the theory is the firm’s size whereby the capital is constant while other factors present returns diminishing in short run (Lavoie, 1992). With reference to the long run, the issue of time adjustment promotes the reconfiguration of firm’s sizes hence the firm’s ends up having increase returns due to the decline in the envelope curve or the average cost. In the imperfect competition, there is an aspect of unequal or imbalanced power of the demand and the supply (Finlay, 2000). This leads to a situation whereby the situation interferes with the prices for which the products are sold. It is obvious that when the market is dominated by some monopoly kind of businesses the demand sometimes may be greater than the supply of the products. Thus, there will be increased prices and the increment is not constant because the business owner are at liberty of changing the prices the way they want an example of such kind of business is the stamp selling company. Profit can only be normal in a given industry when they resemble the profits of the profits of the other industries. This means that in a situation whereby the numbers of the firms in a particular industry are not likely to be changed then the profit margin will be normal (Kirzner, 2002). In case there is abnormal profit margin there is likely to be change in the sense that the firms will increase or decrease. If the gap existing between the normal and the supernormal profit becomes very persistence, then there will be imperfect market but there is likely to be a perfect form of competition due to the costs incurred in moving from one industry to the other. On the other hand, imperfect competition will occur when there is no cost incurred in moving form one industry to the other one. Such costs of movement include the licenses. The post-Keynesian theory defines imperfect competition in terms of the individual firms being confronted by a situation whereby the demand curves are sloping. This kind of situation defines a monopoly form of business (Finlay, 2000). A perfect characteristic is the increase in terms of the scale of returns due to the marketing expenses like the advertising, product differentiation, commercial travelers, and facilities for customers. The small firms are held in the state of equilibrium due to market expenses increase. These expanses are what it cost for any firm to venture into the world of competition like the cost of transportation (Kirzner, 2002). This leads to the increase in the marginal cost but with reference to the demand strength of the area. This means that for any given small firm to have an increased market share needs to increase the marketing expenses like increasing the advertisement, which is a factor that is not there in the prefect form of competition. One of the greatest problem or challenge with that is when there is not full standardization of the products or when the market is disorganized, hence the producers are greatly faced with a situation whereby they have difficulty in increasing the production in the market (Mintzberg, 1979). The small firms can however get out of that situation in the following two ways - lowering prices or increasing marketing expenses. By lowering the prices, the firm is likely to sell much more than usual hence demand curve decreases while increase in the expenses of marketing is going to increase the market share for the firm through raising the willing of customers to purchase the products of the firm hence causing a situation of raised demand curve hence imperfect competition. The Austrian theory of perfect and imperfect competition This school of though differs from others in the sense that its subjectivity, modeling absence and praxeological methods are different as compared to the other theories. It is known to have the most realistic perspective as far as the uncertainty is concerned and its role in the system of economic is concerned, with reference to the uncertainty, the two theories of Post Keynesian and Austrian differing in terms of the significances of money, time, and ignorance. According to the school of thought presented by the Austrian theory, there are two uncertainties namely the faulty perceptions and the events specificity (Mintzberg, 1979). According to the Australia theory, it is the responsibility of the entrepreneur to ensure there is a situation of competition (Lavoie, 1992). This theory defines that perfect competition comes up due to existing differences in the creation of wealth as fart as the issue of resource allocation is concerned. According to the Australia theory, the following are the five environmental factors, which influence competition - public decisions on policies, consumer behaviors, competitor, and supplier’s actions, the societal resources from where the firm draws and institutions in the society. The entrepreneur is said to exploit opportunities in the market, which brings about the aspect of competition (Mintzberg, 1979). In such a situation, if the competing firms discovers they are at an inferior level as far as competition is concerned which leads to their disadvantages in competition then they are motivated by the need for superiority to neutralize the superior firm through the process of innovation and resource acquisition (Kirzner, 2002). They do that through resource imitation or investing in some more superior resources. The meaning of superior resources is the investment of the resources, which are far much better than superior firms in existence in terms of value and technology to increase its competitiveness. According to the theory, the following are the main four factors that lead to the perfect competition with reference to the command economies and market base. The fact that competition can be caused by shifting equilibrium, productivity or efficiency problems may be defined by equations, the fact that both the innovations in productivity enhancement and knowledge discovery may be believed to be the exogenous competition process and hence the societal institutions are believed to be superfluous to having efficient producing characteristics as far as the competition is concerned (Finlay, 2000). It is the aspect of competition that motivates different firms to be involved in innovation to increase the productivity according to the neoclassical theory. The firms that are disadvantaged as far as competition is concerned are forced to use their little existing resources efficiently and effectively to yield maximum profits or rather increase their resources. Perfect competition in this theory is considered the use of all possible knowledge of production in the area of competition. By doing that, the firm is able to maximize its profit irrespective its market structure (Hill & Jones, 2007). The issue of competitiveness is defined by the extent to which the firm has power over the market. The radical subjectivity in this theory is useful in that the absence of objective cost marginal undercuts the standard distinctions existing between the monopolistic prices and competitiveness. This explains why the key to understanding competitiveness in as far as this theory is concerned is the issue of entrepreneurship (Chandler, 1962). That is why the conditions and actions of the entrepreneurship are very important in understanding the trends of competition. To understand the trends of entrepreneurship it is very necessarily to know the uncertainties, which are involved in the process like the risks involved, probabilities, and the entrepreneur’s imaginations (Lavoie, 1992). The competition then comes up because of rivalries of the entrepreneurs. In the Australia theory, there is an aspect of individualism because the theory is based on the individual people. This is whereby the radical subjectivism leads to individual interest for their own rights as far as the considerations of warfare is concerned. Conclusion It is very evident that the issue of competition is defined differently as far as the theory of Post-Keynesian and Australia theories are concerned. This is because each of the theories has its own advantages and disadvantages. One of the main differences between the two is the fact that the Australia theory is defined with reference to the individualism while the post-Keynesian is majorly concerned with the uncertainty, also the two theories of post Keynesian and Austrian differing in terms of the significances of money, time and ignorance (Burns, 1961). Reference Burns, T. 1961. The Management of Innovation. London: Tavistock. Chandler, A. 1962. Strategy and structure: Chapters in the history of the American industrial enterprise. Cambridge, MA: MIT Press. Finlay, P. 2000. Strategic management: an introduction to business and corporate strategy. New York: Pearson Education. Hannagan, M. 2005. Management concepts and practice. England: Prentice hall. Hill, C. & Jones, G. 2007. Strategic Management: An Integrated Approach, 8th Ed. London: Cengage Learning. Kirzner, I. 2002. The driving force of the market: essays in Austrian economics. London: Routledge Lavoie, M. 1992. Foundations of post-Keynesian economic analysis. Sydney: Edward Elgar. Mintzberg, H. 1979. The Structuring of Organizations. Englewood Cliffs, NJ, USA: Prentice-Hall. Read More