 matter more charitably, while pure competition may describe the final outcome of a particular competitive situation, the ultimate end result, it does not describe the competitive process that produced that particular outcome. The purely competitive theory is not a theory of competition as such.
The neoclassical habit of confusing competitive process with a final, static equilibrium condition makes for gross errors in economic analysis. For instance, product differentiation, advertising, price competition (including price discrimination), and innovation are rather routinely condemned as "monopolistic" and, thus, as resource misallocating and socially undesirable. This condemnation follows "logically" since not one of these activities is possible under purely competitive conditions. Hence everything that is truly competitive in the real world, truly rivalrous, gets labeled as "monopolistic" and resource misallocating in the Alice-in-Wonderland, purely competitive world. The analytical conclusions one is forced to come to, employing the purely competitive perspective, are not just wrong, not just unrealistic, but the very opposite of the truth. Far from being able to "predict," or, tell us anything meaningful concerning competitive behavior, pure competition can only describe what things would be like if the world contained zombie-like consumers with homogeneous tastes, atomistically structured firms identical in every important respect, with no locational advantages, no advertising, no entrepreneurship, and no rivalry whatever. Surely this is the major flaw and absurdity inherent in the purely competitive perspective. 4
BARRIERS TO ENTRY: A CRITIQUE
Discussions about the non-legal barriers to entry suffer from the same difficulties. The two most popular and important "barriers to entry" are product differentiation and scale economies. Product differentiation limits competition since it makes competitive entry more costly. To use a favorite neoclassical example, the fact that the major automobile companies change styles every year increases the costs of competing in this industry. Would-be competitors must be willing and able to undergo the same or similar procedures, else they simply cannot compete. Even worse, once competition is "limited," the auto companies routinely pass along the higher costs in the form of higher prices, which contribute, it is alleged, to a real reduction in consumer welfare.
On the other hand—indeed, on the opposite hand—scale economies also limit competition. The fact that certain firms realize lower costs per unit because of large volumes gives these firms the "power" to exclude smaller firms, or smaller potential entrants, from the market. Ergo, we are supposed to regret the reduced competition and consequent resource misallocation since inefficient firms cannot compete with efficient ones.
Actually, of course, the neoclassical theorists have gotten the matter completely and precisely backward. It is because, and only because, consumers find resources satisfactorily allocated that would-be competitors find entry difficult or impossible. Product differentiation, especially differentiation that does raise prices, can only act as a barrier to entry if consumers prefer that differentiation, and pay the presumably higher prices associated with, say, new annual auto styles. If consumers do not prefer such differentiation and, instead, reward the firms that change styles less often, or not at all, then product differentiation could hardly act as a barrier to competitive entry. Indeed, in the case just postulated, product differentiation would be an open invitation to entry and to competition.
To condemn commercially successful product differentiation as a misallocation of scarce resources, therefore, is to condemn the very "resource allocations" that consumers apparently prefer. It is the neoclassical economist's allegedly "optimal" allocation of resources under purely competitive conditions that product differentiation upsets, and not any allocation that can be associated with free consumer choice.
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