ABSTRACT
Imperfections and frictions in the workings of the forces of competition, such as institutional arrangements or monopolistic elements, have always been recognized by economists when representing market mechanisms (Cassells, 1937). However, it was believed that rigidities in the market mechanism did not seriously impede the working of competition and that it was therefore reasonable to make the general assumption of ‘perfect’ or ‘pure’ competition in the theory of markets, as a tolerably close approximation to the real world. In fact, the classical and neoclassical visions of the working of competition differed radically, as did their theories underpinning the price mechanism, but they were less distant as far as the generality of the assumption of abstracting from frictions and imperfections was concerned. In the 1920s and 1930s a new wave of research gathered from the opposite presumption, namely that the perfect competition assumption lacked realism, drawing attention toward new market features and other forms of competition, and so specific apparatus to deal with them was sought after. However, like most intellectual ‘revolutions,’ imperfect competition was more a reaction against rather than an endorsement of a unifying research program; in fact, there was a greater consensus on the reasons for abandoning perfect competition than on how to represent the working of ‘imperfect’ markets. The ‘leading players’ in the imperfect competition revolution in the 1920s and 1930s were many; according to Samuelson, the list includes Kahn, J. M. Clark, Viner, Sraffa, Hotelling, Robertson, Robbins, Shove, Austin and Joan Robinson, Harrod, and Chamberlin (Samuelson, 1994, p. 55). While Marshall and Pigou certainly contain some ‘loose hints’ to the ‘middle ground between monopoly and competition’ (Whitaker, 1989, p. 189), it was the ‘new’ generation of Cambridge economists who cultivated the new research ground. The path-breaking insights by Sraffa, the building up of a new theoretical system by Kahn and Robinson, and the extension of market imperfection to macroeconomics by Kalecki constitute the major achievements in the Cambridge (UK) tradition. On the other side of the Atlantic, in Cambridge, Massachusetts, Chamberlin and Triffin developed a system of thought that featured market
competition based on strategic interdependence among sellers and product differentiation. While sharing with the other Cambridge authors mistrust in the perfect competition assumption, they were not ingrained in the Marshallian tradition and they drew their inspiration from different sources (Reinwald, 1977). By the early 1950s, after a heyday of nearly two decades, the imperfect competition revolution came under attack both by the Chicago school, which reinstated a free-market approach both to micro-and macro-issues and, surprisingly, also as a result of the lukewarm acceptance of the mark-up pricing approach within the Cambridge (UK) school (A. Robinson, 1950; Kahn, 1952). It was only in the 1980s that a ‘second’ imperfect competition revolution took place, in reaction to the pervasiveness of the free competition assumption and in an attempt to give microeconomic foundation to the Keynesian approach to market failures. A new and rich literature, based on various types of imperfections and rigidities, has developed over the past 20 years, once again challenging the wisdom that competition can be treated in general as perfect. In the ‘second’ imperfect competition revolution, uncertainty, asymmetric information, preferences, and nonincreasing costs have been given the central role in explaining the occurrence of imperfections and rigidities in the mechanism. This chapter examines the development of the ‘first’ imperfect competition revolution in the two Cambridges, briefly reviewing the work of the authors who were the major protagonists of a change in the economic representation of market mechanisms, and concluding with some thoughts on its legacy after the highs and lows of its fortunes.
