Thursday, November 15, 2018

Perfect Competition #2

Chapter 2 of Information and Investment is about information available to entrepreneurs. Richardson calls market conditions the projected activity of others – such as customers, competitors or suppliers – by which the profitability of an entrepreneur’s investment is directly or indirectly influenced. All other conditions such as production possibilities created by the existing technology are technical conditions. Corresponding to these are market information and technical information. The extent to which an entrepreneur can obtain market information depends on the nature of economic organization in a way in which access to technical information is not. The profitability of any particular investment project will depend on the investment implementation of other competitors and suppliers. “It follows from the nature of these relationships – which will be considered more fully in later chapters – that any single investment by an entrepreneur will in general be profitable only provided, first, that the volume of competitive investment does not exceed a critical limit set by the demand available, and the volume of complementary investment reaches some minimum level” (31).

[Me: The differences between competitive investment and complementary investment have not been elaborated at this point. They are in chapters 3 and 4. Meanwhile and simply, competitive investments are made by competitors and complementary investments are made by suppliers.]

It is reasonable to expect that information about these would never be quite complete or wholly lacking. Suppose entrepreneurs E1 and E2 accurately predict an increase in aggregate demand for their product, but neither knows about the other’s prediction. Both might increase production enough to satisfy the full amount of increase in demand or a large part of it. If so, there will be an excess supply and the expectations of both are not met. More than two such entrepreneurs make the outcome even less determinate. The perfect competition model even assumes there are numerous competitors. Expectations are sometimes reluctantly considered in the perfect competition model, but there is no recognition that their rational formation requires a basis of information and its availability.

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