Abstract
The standard neoclassical equilibrium arguments used to justify the model perfect competition—and thereby the supply side of supply and demand analysis—are erroneous. The textbook proposition that the individual firm’s demand curve is horizontal was disproved by Stigler in 1957, Stigler’s elasticity convergence equation is easily shown to be invalid if there is a minimum firm size, and the mantra that a firm maximises profit by equating marginal cost and marginal revenue is wrong in multi-firm industries. The only feasible defence for perfect competition comes from game theory, and in this paper we give some tentative reasons why this defence may also fail. We conclude with a plea that the economics finally heed the empirical work on firms that shows that marginal cost and marginal revenue are irrelevant to actual corporations, and start to model reality rather than myth.
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