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Friday, November 1, 2013

Thoughts on Chamberlin and Robinson

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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