We take a step back from discussing Paul Samuelson to learn about Edward Chamberlin, "the man who drew Samuelson to Harvard" (p.109). Edward Chamberlin is important because he came up with the theory of Monopolistic Competition, which in a nut shell is "any seller who had a market mostly to himself could sell not at a market price...but rather at whatever combination of quantity and price he thought would afford him the greatest profit." (p.112-113) The example given in the book is on railroads, and how they had no real competitors on shipping and transportation. Also mentioned is price discrimination which is charging different prices to different people. Sadly Chamberlin published at the wrong time and his book, Theory of Monopolistic Competition, was ignored due to the onset of the Great Depression.
Other topics of interest from this chapter are 1. Joan Robinson, who also developed theories on Monopolistic Competition, but not to the same extent as Chamberlin. 2. Chamberlin's work on Oligopolies, which are a few firms that collude to drive prices/revenues up. 3. The theory of "Indivisibility" by Nicholas Kaldor. I still don't really understand what this is, but it seems like he is just saying that specialization results in market power which causes increased returns.
A for Basil.
ReplyDeleteRobinson is a bigger deal in the profession than Chamberlain. But, I think it is fair to say that Chamberlain's model of monopolistic competition was more accessible than Robinson, and still forms the core of that part of microeconomics texts.
Chamberlain's theory later forms the basis for incorporating increasing returns into general equilbrium modeling in the 1970's.
Basil didn't understand the use of indivisibility. This is along the lines of what we now think of as fixed costs. You can't start selling until you pay those. This is often the source of increasing returns to scale: you pay the big fixed costs to enter the market, and then all your sales are "gravy". The question is, can you make enough of them to recoup the fixed costs before you go bankrupt.