The Representative Firm and Imperfect Competition

Abstract

In a recent paper, J. N. Wolfe has interpreted P. Sraffa as having exposed a logical inconsistency in Marshall's Principles of Economics. According to Wolfe, Sraffa interpreted Marshall as being concerned with perfect competition and yet as allowing his representative firm to possess unexhausted internal economies; he therefore believed that Marshall was inconsistent, for the two phenomena are incompatible. Wolfe himself interprets the Marshallian representative firm as an oligopoly model.This note discusses the following points. First it will be shown that Marshall's model when discussing increasing returns and the representative firm involved neither perfect competition nor oligopoly but imperfect competition. Second, I shall argue that the representative firm was largely designed to describe the problems which exist when product differentiation is recognized but when the industry is retained as a meaningful concept. That is, Marshall faces the same difficulties as those faced by J. Robinson and E. Chamberlin, but his solution involves a different approach. This is not to suggest that there was no need for the Robinson and Chamberlin volumes; indeed their appearance, together with Sraffa's article, reflected the unsatisfactory state in which Marshall left his analysis on this topic. Third, it follows from our interpretation that for Marshall the representative firm was a structure of the mind, a tool of analysis, and not a real firm. To clarify his views, I reproduce certain passages from which it is clear that he is not guilty of logical inconsistency either in the case of actual firms, or in the case of the representative firm.