The deeper criticism of perfect competition, though, is that it is irrelevant in a dynamic world.
The economy again faces the trade-off between the purpose of promoting social welfare and the private means to create and deliver the corresponding goods and services. Technology is arguably good for consumers, decidedly less so for many producers and their shareholders. The problem is becoming pregnant already in the media industry, in pharmaceutics and biotechnology, in manufacturing as well as in administrative services.
With the rise of the information goods, downward pressure is continuously exerted on prices and thus on profits. If marginal production costs – the cost to copy, or share, or distribute – tend to zero, consumers will demand prices that do so too. Barriers to entry that used to mount a formidable defense of long-term profit margins against competitors have all but disappeared. Has the capitalist ideal of “perfect” competition finally been realised?
Not so fast. The irrational exuberance that sent the Nasdaq sky-high fifteen years ago rationalised itself by believing that technology would, for each and everyone of those companies, open up large markets in which they would be the winner-takes-all. The combination of negligible (marginal) production costs of digital products, and the network effect that makes those goods more valuable when used by more people was too good to be true. The dream of every startup is to become a monopolist – but, by definition, the latter come in limited supply.
On the demand side, the end user has become empowered. Asymmetries in information – the seller knowing more than the buyer – have been eroded together with the barriers to entry. Price comparisons, fact checking, peer recommendations make it more difficult for any producer to stand out. Unquestioning brand loyalty and advertising power are dwindling. As do profits and rents. In all but a few niches, it is simply too easy to bring a competing offer to the market.
Economists are at a loss how competitive markets can continue to foster innovation and creation in such a destructive environment. The “new” economy is very much driven by positive, destabilising, feedback loops. Rising demand will lead to lower prices and even more demand, as opposed to the “old” paradigm in which more demand puts pressure on producers and forces prices higher until demand subsides again. The upshot is that variable costs that structurally go down, combined with relatively high fixed up-front costs, nudge industries towards monopoly. The first to scale hits the jackpot, a few maybe break even, everyone else fails.