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Perfect Competition: “Gobble”-degook

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Almost all contemporary economists, except for Austrian economists, persist in analyzing the performance of the market economy using the model of “perfect competition.” Many of these economists go even further and use this hypothetical fictional construct as a normative standard for judging the performance of real-world market economies. They label as “market failures” huge firms, differentiated products, vigorous price competition, and promotional advertisng, because these market phenomena do not conform to the outcomes specified by the perfectly competitive model. But perfect competition describes the economy of a Never Never Land in which, among other things: all units of a given good are absolutely homogeneous, or indistinguishable from one another, and are available in infinitely divisible units; there is only a single price for a good prevailing throughout the economy; every firm constitutes such a small part of the market that it is a “price taker” and, as such, is unable to raise its price by even one cent above the prevailing “market” price without losing all its customers; nor does any firm ever seek to lower its price because given its minuscule size it can sell all it wants to the market without in the least affecting the overall supply and market price; and all buyers and sellers possess perfect knowledge of bid and offer prices throughout the market. In this world of completely homogeneous and infinitely divisible products, teeny-weeny firms, and perfect knowledge, perfect efficiency means that prices are equal to average (money) costs for each and every good, profits are zero, price and quality competition are nonexistent and advertising is completely absent.

Now economists of the “free-market” Chicago School of economics concede that perfect competition gives a grossly unrealistic portrayal of the market economy. But they claim that the use of this fictitious construction yields accurate predictions about the response of market prices and quantities to changes in tastes, technology, resources, taxes and so on. Other, less market friendly economists argue that while real markets are not, and probably can never be, perfectly competitive, they should be made to conform as closely as possible to the efficiency ideal of perfect competition by government interventions such as antitrust laws, taxes and subsidies, controls on prices, regulated quality standards and advertising claims, regulation of public utilities, etc. Austrian economists strongly demur. They argue that, given the absurd and wildly unrealistic assumptions and implications of perfect competition, it is useless as an analytical tool and, therefore, can neither adequately explain market outcomes nor serve as a valid standard by which to evaluate their efficiency.

Let me illustrate these points by focusing on a market which almost all of us have familiarized ourselves with over the past few weeks: the market for Thanksgiving turkeys. After all, a turkey is a turkey is a turkey. Turkeys are a fairly homogeneous commodity whose units can be divided down to the ounce. There are numerous suppliers on the retail level and the prices they charge can be easily ascertained by buyers. The technologies for raising and processing turkeys and selling them at retail are not proprietary or very complex and costly to learn and are available to anyone who wishes to compete in the market. Superficially, it would seem that the structure and performance of this market should loosely approximate a textbook perfectly competitive market. We would expect a single price for a fairly homogeneous commodity that adheres closely to its per unit costs of production.

Yesterday my wife and I purchased a fresh turkey breast for $2.49 per lb. at our local Stop and Shop supermarket. We did not purchase a whole turkey because we will be having Thanksgiving dinner at a relative’s house and the turkey breast will serve as “leftovers” for the weekend for turkey soup and sandwiches. At the same store we could have purchased a whole fresh turkey at 1.29 per lb., a fresh turkey untreated with hormones or antibiotics at $1.99 per lb., or a frozen turkey at $.58 per lb. Another fresh whole turkey with a national brand name could be had at the same store for a $1.49 per lb. Less than a mile away, Target, a discount store, was advertising a national brand name frozen turkey for .97 per lb. and a frozen turkey breast for .99 per lb. At the same time, two miles away, Shop Rite was offering fresh whole turkeys at .50 per lb. to those shoppers who purchased more than $25.00 worth of groceries. If you were so inclined you could have purchased a 15 lb. frozen Tur-Duc-Hen (chicken inside a duck inside a turkey) for $59.34.

Ranging farther afield , according to a recent article in the New York Times, I could have purchased: old-fashioned or “heritage” turkeys (more thigh meat, less breast meat than regular turkeys) for $114.00 plus shipping for a 16 pounder from a seller in Brooklyn, NY; or free range turkeys for between $99.95 and $175 plus $15 shipping from Sonoma, CA.

So contrary to the perfect competition theorists, the market for turkeys displays a wide dispersion of prices and provides a highly differentiated product (fresh or frozen, brand name of private label, whole or breast only, turkey alone or in combination with other types of fowl, etc.). In addition, there is very little correspondence between selling prices and monetary costs of production. In the New York Times article, the costs of raising and processing turkey were estimated at $1.17 per lb. exclusive of shipping. Many if not most supermarkets sell turkeys far below this cost of production, usually as a loss leader to lure shoppers into the store. For example, an executive of one grocery store chain in Connecticut estimated that his stores will make no profit on its sales of one million lbs. of turkey for Thanksgiving. However, it will profit handsomely from selling side dishes that are typically consumed with the meal.

So is all inexplicable disorder and inefficiency in the market for turkeys and almost all other markets in the economy because they fail to meet the standards of the arbitrary intellectual construction of perfect competition? Of course not. Once we replace the model of perfect competition with the the Austrian concepts of rivalrous competition and consumer sovereignty, we begin to see the orderliness and efficiency of the market.
What we experienced in the turkey market and regularly experience in almost all other markets in the economy is the unfolding of a rivalrous competitive process among entrepreneurs seeking to profit by identifying, combining, and transforming undervalued resources into uses most highly valued by consumers. This process is driven by consumer preferences and their expression in choices of what to purchase and what not to purchase. A turkey is not an objective, homogeneous good but is determined by the subjective values of buyers. Since consumer tastes are radically differentiated from one another, a “turkey” can mean different things to different people. To succeed and profit, therefore, entrepreneurs must produce and supply a “turkey” as a carefully chosen combination of multiple quality and price dimensions that at least some consumers find more attractive than all other available “turkey packages” on the market. The range of prices and kinds of turkeys that you and I encountered while shopping was thus an efficient response by entrepreneurs to fickle and ever changing consumer wants. So is the difference in the size of turkey firms: from the 400-acre Willie Bird Turkeys farm in Santa Rosa, California that sells heritage and free range turkeys to the boutique market to Butterfall, Inc., the largest vertically integrated turkey producer in the United States which accounts for 20 percent of total turkey production in this country. Promotional advertising of existing products like turkeys also becomes intelligible as an inherent feature of the competitive process as a method of alerting consumers to the existence of the variety of new suppliers, brands, and kinds, and prices of turkeys which are continually emerging on the market.

So now you can enjoy your turkey dinner–whatever it is.

Joseph Salerno is academic vice president of the Mises Institute, professor emeritus of economics at Pace University, and editor of the Quarterly Journal of Austrian Economics.

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