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Overview
Developing his theory in the world of the standard Leontief system, Hukukane Nikaido attempts to construct objective demand functions reflecting the interdependence of economic agents in the real world upon which the monopolist's control of prices or output ultimately depends.
Originally published in 1975.
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Product Details
| ISBN-13: | 9780691644899 |
|---|---|
| Publisher: | Princeton University Press |
| Publication date: | 04/19/2016 |
| Series: | Princeton Studies in Mathematical Economics , #1391 |
| Pages: | 160 |
| Product dimensions: | 6.30(w) x 9.30(h) x 0.90(d) |
Read an Excerpt
Monopolistic Competition and Effective Demand
By Hukukane Nikaido
PRINCETON UNIVERSITY PRESS
Copyright © 1975 Princeton University PressAll rights reserved.
ISBN: 978-0-691-04206-0
CHAPTER 1
Monopolistic Competition and General Equilibrium
I.1 Introduction
The theories of monopolistic or imperfect competition have been well evolved and elaborated through the works of J. Robinson, E. H. Chamberlin, H. von Stackelberg, and others ever since that of A. Cournot. Their works analyze not only the monopolistic or monopolistically competitive behavior of a single firm but also the equilibrium situation of a monopolistically competitive market involving several firms.
Nonetheless, illuminating though the achievements of these authors are, we remain dissatisfied with the present status of our knowledge about monopolistic competition. For even though market equilibria are analyzed, the analyses are worked out from so fatally the partial equilibrium theoretic points of view that they pay little attention to the national economy-wide interdependence of firms. The traditional theories of monopolistic competition always conceal part of the national economy as a closed system of interdependent vital factors, which is hidden and left intact behind the magnificent performances of competing firms in the foreground. Thus, we are dissatisfied with the traditional theories, especially when we are concerned with the income distribution aspects of a noncompetitive national economy, since the lack of attention to the entire economy-wide interdependence prevents them from shedding light on income distribution under monopolistic competition.
It is frequently pointed out that an economy involving monopolistic factors fails to achieve the efficiency of resource allocation. Knowledge of this kind is, however, not far beyond common sense, unless it is based on an analysis of the overall working of the entire economy in question.
R. Triffin rightly emphasizes the need of a general equilibrium theoretic approach to monopolistic competition to pay attention to the interdependent relations among firms. Nonetheless, his image of a well-formulated model of a monopolistically competitive entire national economy is not quite clear. At any rate, everyone is aware that a general equilibrium theoretic viewpoint is undoubtedly needed in order to get insight into the noncompetitive working of the economy peculiar to the present day, and that much work should be done to build general equilibrium theories of noncompetitive economies. An attempt to carry out such work seems to involve tremendous difficulty since there is nothing available in the literature on which to base a new clear-cut formulation of a noncompetitive entire national economy, unlike a work based on the well-posed Walrasian general equilibrium formulation of a competitive national economy.
The pioneering work along the lines emphasized above was done by T. Negishi (Ch. 7) in the early 1960s. This illuminating work is based on the incorporation of monopolists' perceived demand functions into a general equilibrium situation in an ingenious fashion. His result generalizes the Walrasian competitive equilibrium so as to include both perfect competition and monopolistic competition, because perfect competition emerges when the perceived demand functions are of a special form. The crucial line of Negishi's thought, to formulate a monopolistically competitive equilibrium situation, was further elaborated by K. J. Arrow and Arrow and F. H. Hahn (Ch. 6, pp. 151-168). These results, along with Negishi's thought, are the only works available so far in the literature of general equilibrium theories of monopolistic competition. True, they undoubtedly shed much light on the working of the economy under monopolistic competition. But perceived demand functions embody only firms' subjective perception of the economic situation and conjectures as to rival firms' behaviors rather than a direct recognition of the interdependence of firms in the objective sense. A monopolist controls prices or output through the interdependent relations among economic agents in the objective sense even if his decision making is based on a profit estimate in terms of his perceived demand function. So we are still not completely satisfied with our knowledge about monopolistic competition in the general equilibrium context.
The purpose of this work is to illuminate the interdependence of agents in the general equilibrium context in the objective sense by constructing objective demand functions. Much difficulty is inherent in such an attempt. In order to overcome it, this attempt will be pursued in the simple world of the standard Leontief system in which special advantage can be taken of both the well-behavedness of the basic model and the Marxian labor and surplus value concepts. The remaining part of this section will clarify in further detail the unsatisfactory status of theories of monopolistic competition in the general equilibrium context on one hand, and the basic ideas, concepts, methods, and results in this alternative approach on the other, in Sections 1.2-1.6.
1.2 Interdependence in the objective sense
In the Walrasian general equilibrium theory, crucial economic magnitudes are mutually interdependent, even when the situation lacks such factors as external economies and diseconomies and consumption externalities making economic agents directly interdependent not just through market mechanism. Interdependence through market mechanism is imposed on every economic agent by the structural characteristics of the economy regardless of whether or not he recognizes it. In general the agent's perception of this interdependence is more or less imperfect and limited. For example, an atomistic consumer in the Walrasian general equilibrium situation is aware only of the current prices, his taste, endowment, and income, but not of the current situation of the market. Nonetheless, interdependent relationships among economic agents, including him, exist and are clear to the omniscient and are embodied in the aggregate market demand and supply or excess demand functions. True, his taste is subjective and peculiar to him, but the aggregate market excess demand functions, which integrate the individual behaviors of all economic agents including his, are given to the market in the objective sense. Interdependence of this kind, which may be referred to as interdependence in the objective sense, must exist even in the general equilibrium situation involving monopolistic competition prior to its more or less imperfect perception by economic agents.
This interdependence in the objective sense in a monopolistically competitive general equilibrium situation is what I intend to establish as one of the purposes in this work. One of the reasons why it is important to establish or realize this interdependence is as follows. An atomistic firm can have an illusion that it is powerful enough to influence the market price formation, even though its influence is practically negligible in the objective sense. A firm whose perceived demand function is steeply downward sloping cannot be a powerful monopolist unless it is practically influential and capable of forcing the market price formation to function through the interdependence in the objective sense toward the goal it desires to achieve. A mere Don Quixote need not be a powerful monopolist.
It should also be noted that a firm's behavioral pattern and the interdependence to which the firm is subjected are different things in principle though they may be intertwined in actuality. The behavioral pattern influences the market price formation, but, conversely, the degree of its influence hinges on, and can be assessed only in terms of, the objective framework of interdependence.
1.3 Subjective versus objective demand functions
In the theories of monopolistic competition, one talks often and easily about the "demand function" of a firm. One is happy enough not to know what it is so long as one's concern is only with the behavior of the firm, or with the monopolistic competition among several firms having respective demand functions. But happiness fades when one becomes seriously interested in the working of a national economy involving monopolistic competition where all economic agents are mutually interdependent in a completely circular way.
Demand for goods must be effective demand coming from the incomes earned by agents in the national economy. The traditional oligopoly theorist pays little attention to the source of effective demand. He lets a monopolist firm seek a maximum of its profit calculated in terms of its demand function. Suppose the maximum monopoly profit is distributed among certain agents. The distributed profit will be spent and will result in the effective demand for goods. Thus, the demand function may have profit as one of its arguments. How ignorant can the theorist be of the possible inconsistency of profit as one of the arguments in the demand function with that as the firm's maximand calculated in terms of the function?
There might be an objection to the above discussion with a possibility in mind that the firm's profit in question is not among the arguments of its demand function. Now, suppose that there are n goods in the economy and that the supply of each good is monopolized by a firm whose demand function may include profits of the firms as its arguments, except its own profit. The oligopoly theorist can hardly ignore such inconsistency even in this special situation. For if the national economy as a closed system of mutually interdependent magnitudes is taken into consideration, the profit of each firm must eventually enter the demand functions of some other firms, though possibly not its own demand function, as arguments, so that the inconsistency problem cannot be ignored in the economy as a whole.
One might regard a firm's demand function as a partly revealed portion of an objective demand function. But this view is not decisive unless the objective demand function as such is unambiguously formulated. It is now a dominant view of general-equilibrium-inclined authors that the demand function of a firm is a perceived or subjective one rather than an objective one. The firm perceives to what extent it is powerful enough to affect the market price formation. The perception may more or less involve the firm's production capacity and the market situation with which the firm is confronted, including its conjectures as to the rival firms' behaviors. The result of the perception is represented in terms of a demand schedule for its product, which is a familiar traditional concept in competitive situations.
As was remarked above, Negishi (Ch. 7) formulated a general equilibrium situation involving monopolists who seek a maximum profit on the basis of their perceived demand functions, and he proved the existence of an equilibrium. There are loose connections between their perceived demand functions and the actual market situation. The monopolists' profit maximization is shown in his paper to become consistent with the actual market situation at equilibrium, so that the inconsistency problem touched on above is taken care of.
This result of Negishi is the first important pioneering work in the general equilibrium theoretic analysis of monopolistic competition. Nevertheless, it is not completely satisfactory for the following reason, even though it is taken for granted that he is concerned only with solutions of the Cournot-Nash equilibrium point type.
O. Lange (Ch. VII, p. 35) states:
The nature of economic equilibrium, as well as of disequilibrium, in a monopolistic or monopsonistic market differs from that in a perfectly competitive market. In the latter, disequilibrium consists in excess demand or excess supply. Monopolistic supply, however, is always equal to the demand for the good in question and monopsonistic demand is always equal to supply. A monopolistic or monopsonistic market is in equilibrium when the quantity sold and bought is such that it maximizes the profit of the monopolist or monopsonist.
It is not quite clear here whether Lange was clearly conscious of the distinction between perceived demand functions and objective demand functions. But his lucid characterization of a monopolistic and monopsonistic market in the passages would not be utterly enlightening if objective demand or supply functions were not in his mind.
This characterization, when carried over to the general equilibrium situation, suggests that a monopolistically competitive national economy can be so characterized that demand and supply are balanced for every good in any price situation, while the economy is in equilibrium if, and only if, monopolists' maximizations of their profits are realized consistently and simultaneously. The situation considered by Negishi diverges from that characterized above because "disequilibrium consists in excess demand or excess supply" generally, except in equilibrium at which excess demand and excess supply disappear while the profits of the monopolists are maximized consistently and simultaneously. This comment may apply more aptly to the special case of Negishi's result, where the supply of each good is monopolized by a distinct monopolist who dominates the market of the good in Negishi's terminology, but there are no competitive producers in the economy. It is not clear whether the economy is in a process of tatonnement when "disequilibrium consists in excess demand or excess supply." Nor is it clear how convincingly monopolists can perceive the demand schedules for their products based on the information data of the markets in which "disequilibrium consists in excess demand or excess supply" generally. All these doubtful points arise from the lack of objective demand functions in Negishi's results.
He also considers a dynamic process of market price formation in which the price of a good whose supply is dominated by a monopolist changes in the direction of the discrepancy between his expected price and the current price. If the market accords with the Lange's characterization of a monopolistic market, the current prices must always equate the demand and supply of the goods in the objective sense. At any rate, this dynamic process does not make much sense unless it is formulated in terms of well-defined objective demand functions.
Negishi's results may, therefore, be thought of as a generalization of competitive equilibrium rather than as an analysis of monopolists' control of the market price formation directly through the national economy-wide framework of interdependence in the objective sense. His results can and will be reconsidered and better reformulated in IV. 3 on the basis of objective demand functions, whose construction is one of my purposes in this work.
1.4 Difficulties in the construction of objective demand functions
Now that we have called attention to the importance of interdependence in the objective sense in the analysis of the general equilibrium situation of monopolistic competition, especially, objective demand functions as a specific form of its conceptual representation, it is time to consider difficulties inherent in conceiving and, preferably, constructing them.
First, it should be noted and borne in mind that the very familiar concept of demand function as such more or less presupposes the presence of competitive atomistic agents who behave as price takers. If no competitive atomistic price taker is involved in the national economy as a closed system, so that it is composed solely of nonatomistic price setters, no demand function can be conceivable. In such a situation, the economy will be a battlefield of bare bargaining, negotiating, and bluffing among all agents, and could be studied only from a purely game theoretic point of view, but not from the traditional point of economic thought based on the concept of demand and supply functions.
A demand function is the representation of integrated behaviors of competitive atomistic agents taking as parameters beyond their control the prices that are the arguments of the function. In this work, I will not be so drastically radical as to eliminate completely any form of demand functions. What I have in mind is a situation in which several competing monopolists are confronted with their respective demand functions for their products. Then, what does distinguish my intention from the traditional lines of thought in the theories of monopolistic competition? There are the integrated behaviors of competitive atomistic agents behind the demand functions of the monopolists as in the traditional theories. But unlike the traditional theories, I am seriously concerned with inquiring into the sources of the demands for their products as effective demand, namely, national income. It is extremely important to realize that the very profits of the monopolists compose directly, or indirectly through their distribution among shareholders, part of the national income in question, while the profits are calculated in terms of the demands and the costs — the latter, too, being in turn a source of the effective demand. There is a circular relation which cannot be ignored in the national economy as a closed system, as was noted in 1.3.
(Continues...)
Excerpted from Monopolistic Competition and Effective Demand by Hukukane Nikaido. Copyright © 1975 Princeton University Press. Excerpted by permission of PRINCETON UNIVERSITY PRESS.
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Table of Contents
- Frontmatter, pg. i
- Preface, pg. v
- Contents, pg. vii
- Chapter I. Monopolistic Competition and General Equilibrium, pg. 1
- Chapter II. Surplus Value in the Leontief System, pg. 17
- Chapter III. Objective Demand Functions, pg. 30
- Chapter IV. Monopolistically Competitive Pricing Modes and the Objective Demand Functions, pg. 60
- Chapter V. Welfare Aspects of the Price Mechanism, pg. 74
- Chapter VI. Objective Demand Functions in the Presence of Capacity Limits, pg. 83
- Chapter VII. Monopolistically Competitive Pricing Modes and the Objective Demand Functions, Continued, pg. 107
- Chapter VIII. Welfare Aspects of the Price Mechanism, Continued, pg. 124
- Provisional Epilogue, pg. 139
- Appendix, pg. 141
- References, pg. 145
- Index, pg. 149