Competition and Efficiency: Comment

Abstract

A familiar argument asserts that competition results in the maximum possible efficiency in the use of resources; and therefore in this respect it is superior to central planning and monopoly and other market structures. Even such advocates of socialism as Oscar Lange (1938) and A. P. Lerner (1944) have conceded this claim and have urged that central planning be confined to investment. The traditional theoretical defense of competition emphasizes allocation, but maximum efficiency in the use of resources entails maximum technical as well as allocative efficiency, as many expositions recognize. Such expositions maintain either that the conditions of competition entail maximum technical efficiency, or, less formally, that produces this result. Recently Leibenstein (1966), Comanor and Leibenstein (1969), Scherer (1970), and Shepherd (1970) have argued that technical inefficiency may be the major loss from monopoly and so have given this issue greater prominence. The shift in emphasis away from allocative efficiency reflects the small estimates of the welfare loss resulting from monopolistic misallocation, which intensive examination for biases has not significantly increased (Scherer 1970, pp. 400-404). The shift also reflects the recognition that reasonable estimates of the monopoly effect on price and of the price elasticity of demand yield small estimates of the welfare loss. This paper examines the logic of the model and the argument based on competitive pressure and finds the case for maximum technical efficiency under competition deficient. We will see that even the more modest claim for the superiority of technical efficiency under competition than under alternative market structures remains questionable. Indeed, competition does not even guarantee that an inefficient technique will disappear. A by-product of the inquiry into the logic of the model is the negation of another major normative claim for competition-the claim that it eliminates excess profits. We will see that they can persist. This