Why I love Imperfect Competition

Recently, Donald Trump stated that Americans are too wealthy and that his tariffs will fix that:

Somebody said, ‘Oh the shelves are going to be open.’ Well, maybe the children will have two dolls instead of 30 dolls. And maybe the two dolls will cost a couple bucks more than they would normally.

Indeed, such a mindset has become dominant among Republicans, echoing Bernie Sanders’s earlier lament that Americans have too much deodorant and too many shoes.

There is a sort of economic logic to this scarcityist mindset. It harkens back to the arguments made for socialism by Oskar Lange: competition exists in order to determine how to produce a good/service at the most economic cost. Once that method is determined, then the good/service can be produced at that cost and sold at that price, resulting in perfect competition. Under perfect competition, there is only one version of the product; all goods made in that market are identical—no distinguishing characteristics whatsoever. Consequently, socialism (and Trumpism) can do away with wasteful competition by simply imposing the perfectly competitive method of production.

Perfect competition is sometimes treated as the “ideal” market structure because costs are minimized and price equals marginal cost at the lowest point on the average total cost curve. (I should note that the Sanders/Trump argument isn’t strictly for perfect competition, as in the perfect competition model, more of a good is being produced. They often argue, as in the Trump quote above, that both too much of a good is produced and that there is too much variety.)

Despite the fact that perfect competition is an ‘ideal type,’ I argue that it is an undesirable outcome. Why should one size fit all? People have all sorts of tastes and preferences. Some people like pepperoni on their pizza, some people like anchovies. Some people like opera and some people like heavy metal music. Sometimes you want a TV show that makes you feel good and sometimes you want one that will upset you. Variety, as they say, is the spice of life. But variety is, in economic terminology, imperfect competition. Product differentiation leads to “monopolistic competition,” where firms still earn no economic profit, but average total costs are not economized. Imperfect competition is, according to some, a “market failure” or an “inefficient market.” But, in reality, it is a more efficient market: people’s varied tastes are being met.

I love imperfect competition. It allows you to be you. That is an anathema to the central planners of the world (your Trumps, your Sanders, and your Navarros). Market liberalism means embracing the imperfect and celebrating the market, rather than making arbitrary decisions about what people should want.