The English economist A. Pigou at the beginning of the XX century came to the conclusion that the monopolization of the economy and external effects can seriously disrupt the impact of competition on the efficiency of the economic system. The result is a discrepancy between individual and public interests, a decrease in the level of well-being.
The Italian economist P. Sraffa, working at Cambridge, noted in the late twenties that imperfect competition is not a temporary and insignificant deviation in the mechanism of competition. It is a natural result of the evolution of the market. The effects of economies of scale and the preferences of consumers, differing in habits and inclinations to individual goods, brands, firms, etc. Therefore, there is no single market, it breaks up into a number of separate markets, in each of which there are stable factors of monopolization. According to P. Sraffa, the traditional theory of competition must be revised. The real world is between monopoly and competition, not at one of these poles.
In 1933, two works were published, which marked the beginning of the theory of imperfect competition, which became its classical foundations. The first is the work of the American economist E. Chamberlin “The theory of monopolistic competition (reorientation of the theory of value)”. Chamberlin drew attention to such a means of market competition and the basis of monopolism as product differentiation. In a new way, he considered the impact of demand on the position of the firm as a variable, and not a constant value. He considered oligopolies, noting such an important feature as the need for mutual adaptation of competitors in the oligopolistic industry.
The second work , “The Economy of Imperfect Competition” – was written by the Englishwoman D. Robinson, and, like the book by E. Chamberlin, it became a reaction to the challenges of the time, to the processes of monopolization of the market, the violation of the classical mechanisms of free competition. D. Robinson noted that when analyzing competition, it is now necessary to abandon the assumption of the atomistic nature of industry structures. The high level of concentration of production led to the formation of large companies and a change in the conditions of competition. Unlike E. Chamberlin, it is the concentration of production that D. Robinson considers as the basis of monopolism. Large companies are able to influence market parameters, regulate economic processes. Limiting the number of firms in the industry reinforces the desire to suppress competition, especially aggressive price competition, which can turn into a losing “price war” for everyone. And here again there is a divergence of views between D. Robinson, who considered monopoly the opposite of competition, and E. Chamberlin, who believes that they constitute a contradictory unity.
So, we can come to the conclusion that the appearance of the works of A. Pigou, P. Sraffa, E. Chamberlin, D. Robinson and other economists led to a critical rethinking of the traditional conclusions about the functions of competition, made in the framework of the equilibrium analysis of perfect competition. The authors of theories of imperfect competition emphasized that monopolism:
damages economic efficiency, optimality, and therefore violates the optimal distribution of resources and benefits characteristic of perfect competition; redistributes income, causes an increase in the differentiation of society, which reduces the overall level of its well-being.
In the future, oligopolies became an important object of the theory of imperfect competition. Such forms of mutual adaptation of oligopolistic behavior as cartels, “gentlemen’s agreements”, “following the leader” were analyzed. It turned out that oligopoly is one of the most difficult to analyze market structures, so today there are many theoretical models of oligopoly that characterize its individual aspects.
In the 50s, the attention of researchers of imperfect competition was drawn to such reasons for the limitation of firms in the industry as industry barriers. J. Bain drew attention to the fact that in reality, industry markets differ markedly from each other in how easily new firms can penetrate them, and in the extent to which these latter can impose competition on “old” firms. To take into account these factors, D. Bain introduced the concept of a barrier, by which he understood the specific features of the conditions of supply and demand in the industry, creating certain advantages of firms operating in the industry over potential competitors. The most important industry barriers that form an oligopoly and monopoly include: the need for significant capital investment to achieve economies of scale and competitive production; patent monopoly; privileges received from the state; conspiracies on the division of sales markets, etc.
Since the 70s, studies on the influence of new firms overcoming existing barriers, activating competition in oligopoly industries have come to the fore in the theory of oligopoly. Indeed, the practice of the 70-90s of the XX century demonstrated an increase in the intensity of competition, limiting the possibilities of monopoly influence on the market, increasing the number of competitors in traditional and new industries. All this contributed to an increase in interest in the conclusions of the neoclassical theory of perfect competition. It became possible to synthesize the theory of perfect and imperfect competition. Baumol and some other economists drew attention to the fact that some markets, although they are oligopolies, in fact, do not have high barriers to entry. This poses a threat to potential competition and forces oligopolists to pursue pricing and cost policies that reduce the risk of new competitors entering. The pressure of potential competition can be associated not only with domestic competitors, but also with foreign ones. This becomes especially relevant in the period of widespread transnationalization, globalization of world markets.