A Brief History of Imperfect Competition

I explore the history of the idea of imperfect competition in economics. Its foundations were in the Nineteenth Century, but largely outside the Anglo-sphere. It was only in the 1930s that the idea took off in the U.S. and Britain with Chamberlin and Robinson developing a coherent and well worked out alternative in the form of monopolistic competition, which made it into Samuelson’s iconic textbook Economics in 1948. In the second half of the twentieth century, the idea gradually caught on in different fields of economics, from industrial organisation to international trade, growth and macroeconomics. Here, it replaced the previous orthodoxy of perfect competition as economists realised that in real life firms had market power and that the theory of competitive markets was unable to capture the features of many important real-world markets. When markets are imperfect, it means that they do not deliver an “optimal” outcome and so there is more scope for government intervention and regulation. However, there are different ways of understanding imperfect competition which do not always give the same answer and mean that it is difficult to provide general lessons about market outcomes and the sort of policies required.

By Huw Dixon1

I. THE EARLY YEARS

The model of Perfect Competition has formed the historical framework for economics and how most economists think about markets. As the old quip goes: “Teach a parrot to say “supply and demand” and there, yo