tyles 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.
The same sort of argument can be made—and even more obviously—with respect to scale economies. Consumers do not regret the economies nor the consequent reduction in competition. Consumers could "increase competition" any time they choose to by indicating their willingness to pay higher prices to cover the higher costs of the smaller firms. That they do not usually do this indicates the resources are correctly allocated so far as they are concerned. Again, it is the economist's vision of the purely competitive wonderland that is upset by the large, efficient firm, and not allocative efficiency from a consumer perspective.
The final absurdity in this area is to observe where such incorrect theories of competition are likely to lead. If product differentiation limits competition, i.e., limits the number of competitors, then more competition can be obtained by limiting product differentiation—by law. If efficient techniques of production or scale economies limit competition, i.e., the number of competitors, then more competition can be obtained by raising either costs or prices for the efficient companies—by law. Thus, to take the barriers-to-entry theory seriously is to end up proposing as rational public policy—in the name of consumer welfare—the very procedures that consumers would likely find most harmful. The only thing sadder than all of this is that such ideas have actually been taken seriously in some antitrust circles and by the courts, and we have had some real world legal decisions that reflect such theoretical nonsense.5
As should be quite clear from the above review and critique, there is much dissatisfaction with the traditional notions of monopoly and competition, and with the simplistic antitrust policies (anti-merger policy, for instance) founded on such assumptions. But if the neoclassical approach to monopoly and competition is defective, what is the correct approach in this area? Indeed, is there a logical and rational theory of monopoly and, accordingly, an appropriate public policy to complement 