I return to G. B. Richardson's book Information and Investment: A Study in the Working of the Competitive Economy. My previous (November) posts’ titles start with 'The Organization of Industry’ and ‘Perfect Competition.’
Chapter III is The Co-ordination of Competitive Investments. It is about an entrepreneur’s information and consideration of other entrepreneurs who are his competitors. (Like Richardson did, I use he/his for convenience. It could be she/her, or it/its for a firm, as well.)
The profitability of any one investment project is dependent in part on the volume of investment by competitors. Suppose an entrepreneur expects the demand for a particular product to rise, one that he could fulfill. If he believes the situation offers a profit opportunity for him in particular, he needs assurance that that the volume of investment undertaken by his competitors will not be so much that an excess supply will occur. However, the information available for that assurance often doesn’t exist. In a free enterprise system all the competitors don’t meet and plan their levels of production together. The less they cooperate, the more difficult it is to see how the required information could be obtained. Adequate market information seems unobtainable. Nor can one plausibly contend that it is possible to predict the actions of competitors merely by considering what one would do oneself in like circumstances.
In some circumstances certain producers having a temporary monopoly of information about a general profit opportunity may be important to securing its successful exploitation.
The upper limit on the volume of future competitive supply will depend on the number of firms which could increase their capacity in time and to the extent they could do so. Perhaps for some the extra resources aren’t available. The impossibility of borrowing unlimited sums at the same rate of interest is a crucial check, and an ‘imperfection’ of the capital market that is incompatible with the perfect competition model.
When we consider an individual producer, we should couple his supply curve and his demand curve – not the general supply curve and demand curve for his commodity in a wide market.
Perhaps the most obvious way in which a producer may try to secure the loyalty of his customers is by offering a differentiated product which they prefer to any substitutes. Commodities may be differentiated, not only by their particular attributes, but by where they are available due to transport costs.
The market attachment known as ‘goodwill’ has probably received more attention from businessmen than by most economists. Buyers may be unwilling to patronize a different producer, even if momentarily tempted, if they believe loyalty to him affords the best chance of good treatment over a long period.
The availability of information about competitive production depends on various restraints that reduce the freedom of action of individual entrepreneurs. By assuming, overtly or tacitly, that it is zero, and therefore neglecting the whole problem of information, the perfect competition model is unrealistic and inadequate.