ABSTRACT
We commence our discussion of Knight’s policy response to imperfect competition with an outline of the policy response to imperfect competition which is given by Chamberlin and Robinson. Here, both authors describe how firms capture a degree of market power from their ability to differentiate products. As mentioned above, such power prevents firms from operating at the most efficient level of output, which exists at the minimum of the long-run average cost curve (LRAC). In other words, Chamberlin and Robinson describe a situation where unexploited economies of scale contribute to an efficiency problem. However, this problem proves difficult to solve. Bearing these difficulties in mind, we argue that the only available means of addressing such a problem is to eliminate the market power of the firm. However, this solution is inevitable within their analyses, because its basic axiom centres on the capacity of the firm to differentiate its product from other products in the competitive group.
