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The Representative Firm and Imperfect Competition*

Published online by Cambridge University Press:  07 November 2014

Samuel Hollander
Samuel Hollander*
Affiliation:
Princeton University
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Extract

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.

Type
Articles
Information
Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique , Volume 27 , Issue 2 , May 1961 , pp. 236 - 241
Copyright
Copyright © Canadian Political Science Association 1961

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Footnotes

*

The author is indebted to Professor W. J. Baumol for criticism and advice.

References

1 “The Representative Firm” in Economic Journal, LXIV, 06 1954, 337–49.Google Scholar

2 “Laws of Returns Under Competitive Conditions” in Economic Journal, XXXVI, 12, 1926, 535–50.Google Scholar

3 8th ed., London, 1947.

4 Wolfe, “Representative Firm”; Frisch, R., “Alfred Marshall's Theory of Value” in Quarterly Journal of Economics, LXIV, 11 1950, 495–524 CrossRefGoogle Scholar; Hague, D., “Alfred Marshall and the Representative Firm” in Economic Journal, LXVIII, 12, 1958, 673–90.CrossRefGoogle Scholar

5 Economics of Imperfect Competition (London, 1933).Google Scholar

6 Theory of Monopolistic Competition (6th ed., Cambridge, Mass., 1950).Google Scholar

7 Monopolistic Competition & General Equilibrium (Cambridge, Mass., 1940).Google Scholar

8 “Marshall's Theory of Value.”

9 The Figure is drawn upon the assumption of stability in the Marshallian sense with the D curve cutting the S curve from above. The unstable case is not discussed here.

10 Much of the controversy over the representative firm is apparently due to the use of the term “firm.”

11 The discussion is one where a “large business can command very important advantages which are beyond the reach of a small business.”