Thoughts on Chamberlin and Robinson
By Benjamin Bowman
We have been reading a lot about competition
models, but mostly economists have focused on perfect competition or no
competition. This is mainly because it’s more difficult to create a graphical
representation of imperfect competition. Cournot attempted to explain duopoly.
This perhaps was one of the first official attempts at scholars to do so. The
solutions that Cournot suggested were based on flawed assumptions, but after
about 50 years his work inspired others to take up the challenge including
Chamberlin and Robinson. They each wrote independent books concerning this
challenge.
It is interesting that they wrote
on the same problem at the same time, but independent of each other. Great minds really do think alike, sort of.
The book also makes mention that throughout history there are examples of
similar but independent discovers at the same time. I can only imagine that
certain environments foster new ideas, and often there is simply more than one
person capable of making the discovery.
However, it
wasn’t immediately or directly that Chamberlin and Robinson became a feature
answer to this question. Before they published their books there was already fierce
debate between Taussig and Pigou concerning railway rates. They were discussing
how best to explain the varying railroad rates, either with Marhsall’s joint
supply or with price-discrimination. This was an important debate, mostly
because it challenged the middle ground. In fact, in 1961 Chamberlin attributed
the origin of his theory of imperfect competition to this debate.
Chamberlin
was inspired by this debate to continue to investigate markets that did not fit
into monopoly conditions or perfect competition conditions. He called his new
theories “monopolistic competition.” There are several aspects to his theories,
one of which is product differentiation. Chamberlin realized that not only can
companies compete on price, but also on non-price basis. He recognized that
some firms in a competitive market could have some kind of “unique product or
advantage” that gave them at least some control over price.
Pigou
already recognized this to a point, but Chamberlin elaborated the idea and listed
some examples. An example he used was intellectual property, thought probably
not called that at the time. He said that copyrights, trademarks, brand names
etc., may give a product or company some degree of uniqueness and therefore a
competitive advantage.
It’s
important to notice that advertising in order to differentiate under perfect
competition or monopoly conditions would be countered productive. As a
monopoly, the consumer has no other choice, and so there is no need to
differentiate the brand or product. Under perfect competition, the firm makes
and sells all of its product at a market given price. By definition of a
perfect market, all products would be homogeneous, and therefore there is no
need for brand loyalty or brand recognition. Advertising for differentiation is
a mute point. However, Chamberlain recognized that advertising does work to
shift the demand curve, and in fact it was a common practice.
Robinson,
however, did not contribute much to the role of advertising and product
differentiation as elements of monopolistic markets, but instead developed a
“set of tools” that were useful in the analysis of partial-equilibrium analysis
of markets and market structures. She modified the concept of marginal revenue,
and used it to analyze several different types of markets. Instead of trying to
classify all the different levels of competition (competitive monopolies), she
used the monopoly model to help analyzed them. There are just as many levels of
competition within markets as there are markets themselves. It would be
impossible to catalog each and every one. Therefore, by creating tools to help
analyze the entire spectrum of competition levels, her method was more general
and more comprehensive.
An area in
which Robinson seemed especially interest was price discrimination. Price
discrimination is the practice by a firm with monopolistic power, of charging
different prices to different consumers for the same product. A good example of
this is ski-resorts. While local ski resorts offer fantastic discounts targeted
at locals, they charge “full” price to tourists that travel from around the
world to visit this destination. Why? Because they know the tourists will pay
it.
Originally
described by Pigou, the discussion first evolved around conditions necessary
for price discrimination. First, the
firm has to have some degree of monopolistic (price setting) power. Second, the
firm must be able to recognize or artificially create separate markets for its
products. Third, relative profitability must be different between the separate
markets.
Robinson
showed that Pigou was wrong to assume that price-discrimination would not cause
a change in supply. In fact, Pigou’s conclusion was only accurate for special
cases. Robinson showed that based on the concavity of the demand curves in the
market, the supply will be either increase or decreased depending.
This
conclusion was important in analysis of various transportation and
public-utility markets. Using the contributions of Robinson, we able to
discriminate between markets that would benefit from price discrimination, and
markets that would not. At the same time, markets in which price discrimination
would not benefit the consumer can be identified and price discrimination
limited. Probably one of the largest affects this discussion of price
discrimination had was in anti-trust legislation. Because priced discrimination
requires some level of monopolistic power, a large body legislation in the
United States requires a firm prove the benefit of price discrimination to the
consumer by establishing a kind of “welfare” test using Robinson’s analysis.
It is
interesting that thought they took almost completely different approaches, they
both made significant contributions. The reading makes it apparent, that the
argument of who is right, or if any one answer is better, has not completely
been decided yet, at least at the time of the writing. In my opinion, it would be better to build a
dynamic form of analysis, which instead of trying to predict every variable,
would be able to adapt the model based on the situation. I guess in that way I
lean toward Robinson a little more than Chamberlain.
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