Page 146 - Global Political Economy_Understanding The International Economic Order

SIG NIFIC ANCE O F NEW T HEORI ES
classical world of perfect competition, the self-regulating market
reigns and every economic situation has a single equilibrium solution.
In an oligopolistic market, there are many possible rational economic
outcomes, and power, strategy, and guile are important determinants
of each economic outcome. Oligopolies profoundly change the nature
and functioning of markets. As an old taunt in the economics profes-
sion says, “With oligopoly, anything can happen.” 8
Economists are obviously fully aware of the nature and importance
of oligopolistic competition based on economies of scale. Alfred Mar-
shall himself was cognizant of oligopoly but rejected its significance,
perhaps because of its implications that increasing returns (and hence
oligopoly) would make it theoretically possible for just one or a few
firms to dominate an economy. As time has passed, the subject of
oligopoly has been taken more seriously, and research in the field of
industrial organization on oligopolistic markets has greatly extended
understanding of the ways in which oligopolistic markets work. Yet
it makes economists quite uncomfortable to recognize that oligopolies
9
do exist. The negative attitude of most economists toward the impli-
cations for economic analysis of oligopoly and economies of scale is
conveyed in John Hicks’s comment that increasing returns result in
“the wreckage of the greater part of economic theory.” 10 Clearly,
there is good reason for economists to find oligopoly and imperfect
competition distasteful. However, in political economy, oligopoly and
imperfect competition are central concerns.
The world of oligopolistic competition is best comprehended
through application of the theory of games (or simply game theory)
set forth initially by John von Neumann and Oscar Morgenstern
in their classic study, The Theory of Games and Economic Behavior
(1944). 11 Game theory has become an extraordinarily complex and
8
John Sutton, Sunk Costs and Market Structure: Price Competition, Advertising,
and the Evolution of Concentration (Cambridge: MIT Press, 1991), xiii.
9
For example, one important line of inquiry (that regarding contestable markets)
appears to be motivated, at least in part, by a desire to mute the importance of oligop-
oly by suggesting that under certain conditions oligopolistic markets behave just like
competitive markets. William J. Baumol, “Determinants of Industry Structure and
Contestable Market Theory,” in David Greenaway, Michael Bleaney, and Ian Stewart,
eds., Companion to Contemporary Economic Thought (London: Routledge, 1991),
Chapter 24; and William J. Baumol, John C. Panzar, and Robert Willig, with contribu-
tions by Elizabeth E. Bailey, Dietrich Fischer, and Herman Q. Quirmback, Contestable
Markets and the Theory of Industrial Structure (New York: Harcourt Brace Jovanov-
ich, 1982).
10
John Hicks, quoted in W. Brian Arthur, “Increasing Returns and the New World
of Business,” Harvard Business Review (July-August 1996): 100–109.
11
John von Neumann and Oskar Morgenstern, The Theory of Games and Economic
Behavior (Princeton: Princeton University Press, 1944).
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