The Classical Notion of Competition Revisited (History of Political Economy, Vol. 45, Issue 1) (2013) - Compressed
The Classical Notion of Competition Revisited (History of Political Economy, Vol. 45, Issue 1) (2013) - Compressed
The Classical Notion of Competition Revisited (History of Political Economy, Vol. 45, Issue 1) (2013) - Compressed
Competition Revisited
Neri Salvadori and Rodolfo Signorino
The gravitation of market prices toward natural prices in all markets char-
acterized by free competition was widely affirmed by the classical authors,
despite the lack of a formal proof. In the wake of the revival of interest in
classical economics fostered by the publication of Production of Com-
modities by Means of Commodities (Sraffa 1960), since the mid-1970s a
vast literature has blossomed concerning the stability of long-period equi-
librium within multisectoral models of classical inspiration. (For a survey
of this literature, see Bellino 2011.) Besides the formal results achieved on
the subject of stability, the debate on gravitation has stimulated an in-
depth investigation of the classical notion of market competition (Arena
1978; Semmler 1984; Steedman 1984; Duménil and Lévy 1987). This
investigation has also highlighted some unsatisfactory aspects in the lat-
ter, particularly the actual process of market price determination in a situ-
ation of market disequilibrium:
Little is said concerning the actual process [that governs the function-
ing of the market for commodities]. For example, it is not clear who is
changing prices, what information is used, when this change occurs,
what the outcome is on the market etc. (Duménil and Lévy 1987, 136)
[L’originalità della teoria classica della libera concorrenza] non è però
in grado di nascondere certe insufficienze: l’economia politica classica
si scontra infatti con il problema centrale dell’articolazione tra prezzi di
mercato e prezzi naturali. La soluzione di queste difficoltà richiede una
nuova definizione di questa articolazione. (Arena 1978, 323)1
The aim of this article is to detect and highlight those elements present
in classical texts that may be fruitfully employed to overcome the above
drawbacks of the classical view of market competition. Moreover, as recent
commentators on classical economics have emphasized, in a situation of
disequilibrium, when the quantity of a given commodity brought to the
market differs from Smithian effectual demand, the likely outcome is that
of a dispersion of prices: “Whereas natural price is by definition a singular
magnitude for each kind of commodity, the competitive processes whereby
market prices deviate from natural price under conditions of market
imbalance are consistent with, indeed likely to cause, transactions at non-
uniform prices. That is to say, market price as literally the actual prices
at which transactions occur when there is such market imbalance, is not
in general a singular magnitude” (Aspromourgos 2009, 72; see also pages
85 and 88). Accordingly, we claim that the classical theory of market prices
gives scope to the analysis of the behavior of the agents acting in situa-
tions of market imbalance through some of the analytical tools and formal
results achieved by the modern game-theoretic approach to oligopoly the-
ory, namely, the notion of mixed (i.e., nondeterministic) price strategy.
In what follows, we distinguish and compare two different conceptions
of market competition: the Walrasian notion of perfect competition and
the classical notion of free competition, focusing in particular on Adam
Smith and Karl Marx. We stress that while the Walrasian notion may be
described as an equilibrium state in which atomistic agents treat prices
parametrically, the classical notion is a situation in which agents employ
their market power by setting prices strategically. The absence of a price-
1. [The originality of the classical theory of free competition] is not, however, able to hide
certain inadequacies: classical political economy clashes with the central problem of the
articulation between market prices and natural prices. The solution of such difficulties
requires a new definition of this articulation. [Our translation.]
Salvadori and Signorino / The Classical Notion of Competition 151
taking assumption in the classical authors is the main reason why the
theoretical difficulties besetting the Walrasian notion outside market-
clearing equilibrium do not plague the classical notion as well. Yet though
for the classical authors price undercutting and outbidding are the typical
phenomena that occur in any market characterized by free competition, it
is fair to say that they went no farther than to provide only some unsys-
tematic guidelines on how to analyze in due detail the competitive process
of market price determination. Among other things, we show that Marx’s
extensive use of metaphors and numerical examples hides the modern tax-
onomy of buyers’ market, sellers’ market, and mixed strategy equilibrium
in the capacity space of a standard Bertrand duopoly model. In particular,
we argue that Marx was conscious that between the buyers’ market, in
which the price is determined by the reservation price of sellers, and the
sellers’ market, in which the price is determined by the reservation price
of buyers, there is something in which the price is not unique and any
equilibrium can concern only distributions of probability (mixed strate-
gies) on the behavior of the traders. We substantiate this fact by using a
formalism derived from the contemporary analysis of Bertrand competi-
tion. (The elements required to identify a necessary and sufficient condi-
tion to separate these three different market outcomes are sketched in an
appendix.) We are aware that our analysis, once duly developed, needs to
be related to the contemporary gravitation literature. Yet we defer investi-
gation of this issue to a future paper.2
The structure of the article is as follows. Section 1 compares two differ-
ent notions of the concept of market competition, the classical notion of
free competition and the neoclassical notion of perfect competition, and
highlights some problematic aspects of the latter, absent in the former.
Sections 2 and 3 assess the classical theory of free competition, as devel-
oped by Adam Smith and Karl Marx, with particular concern for market
price determination. Section 4 investigates how the classical notion of
competition has percolated into the modern literature on so-called Ber-
trand competition. Section 5 concludes.
2. The basic model used to represent the classical gravitation process is the so-called
cross-dual model, in which (1) sectoral outputs change in response to differentials in the rates
of profit and (2) market prices change in response to excess demand of the various commodities.
While the first adjustment process is widely accepted as a fair formalization of the classical
principle of capital mobility, the second appears as a mechanical transposition of the Walra-
sian price adjustment process and is the ultimate culprit behind the intrinsic instability of
cross-dual gravitation processes. The present article proposes a totally different market price
formation and should be able to resolve the instability problem envisaged in this literature.
152 History of Political Economy 45:1 (2013)
3. From this point of view, McNulty’s interpretation is akin to those of Samuel Hollander
(1973) and John Eatwell (1987). The former claims that “the Smithian conception of competi-
tion must be carefully distinguished from the modern conception which envisages sellers (and
consumers) as ‘price-takers’ rather than ‘price-makers’” (126), while the latter points out that
“the characteristics of ‘perfect’ competition (notably the conditions which ensure price-taking)
are often read back, illegitimately, into Classical discussions of competition” (63). See also High
2001, xiv–xv; and Machovec 1995, chap. 8. While Blaug (2001, 153) defines Arrow and Hahn’s
1971 tribute to Adam Smith as a forerunner of perfect competition (and Pareto optimality)
analysis no less than “a historical travesty,” a more balanced position is endorsed by Michael
Bradley (2010, 238), who argues that “Smithian ‘liberty’ contains the seeds of perfect competi-
tion, but perfect competition is different from ‘perfect liberty’ in some critical respects, particu-
larly the nature of competition and the role of entrepreneurs.”
4. McNulty (1967, 395–96) provides a discussion of Cantillon and Turgot as forerunners of
Smith on competition. An extensive treatment of the evolution of the notions of price, cost,
and competition before Smith may be found in Aspromourgos 2009, 101–10.
154 History of Political Economy 45:1 (2013)
5. From this perspective Edgeworth’s concept of equilibrium (core) and his adjustment pro-
cess in disequilibrium (recontracting) are superior to the Walrasian ones: “The recontracting
process . . . is based on the same behavioral postulate, blocking by coalitions, that is used to
define the solution concept, the core. [The core is defined to be the set of all unblocked alloca-
tions. That is, it is the set of all allocations such that no subset of the participants can improve
the position of all its members by withdrawing from the system and using only the resources of
its members.] This seems to be a desirable property. It is, however, not shared by most studies of
disequilibrium price dynamics because these involve price changes brought about by a market
manager or other artificiality. Prices do not vary as a consequence of the maximizing behavior
of individuals” (Green 1974, 22).
6. Current textbooks also acknowledge this fact: “Strictly speaking, it is equilibrium market
prices that [consumers and producers] will regard as unaffected by their actions. . . . For the
price-taking assumption to be appropriate, what we want is that [consumers and producers] have
no incentive to alter prices that, if taken as given, equate demand and supply (we have already
seen that [consumers and producers] do have an incentive to alter prices that do not equate
demand and supply)” (Mas-Colell, Whinston, and Green 1995, 314n1, 315; emphasis added).
156 History of Political Economy 45:1 (2013)
7. D (S) is the quantity demanded (supplied) of a given commodity X, p its price, and f(p) and
g(p) the demand and supply functions, respectively, while dp/dt = h(S − D) is the time derivative
that formalizes the law of motion of market price in relation to market excess demand.
Salvadori and Signorino / The Classical Notion of Competition 157
concentrated than the buying side, the main force in changing prices
will be the monopolistic behavior of the sellers. . . . Similarly, if the
buying side of the market is the more concentrated, as in non-union-
ized labor markets, the dynamics will come from that side” (47;
emphasis added).
In the following two sections we make it clear that these two elements of
Arrow’s contribution may be found in Smith’s and, even more explicitly,
in Marx’s treatment of market prices, thus paving the way for a restate-
ment of the classical notion of competition through contemporary game-
theoretic analysis.8
8. Arrow’s 1959 contribution with its emphasis on the role of monopoly theory in explain-
ing competitive price convergence is the ideal starting point for the subsequent neo-Walrasian
literature on disequilibrium trading (see Donzelli 1990, chap. 9).
9. As is well known, David Ricardo (1951, 91) devotes to the distinction between natural
and market magnitudes just the short chapter 4 of his Principles, where he explicitly refers to
chapter 7 of WN, where “all that concerns this question is most ably treated.”
158 History of Political Economy 45:1 (2013)
that only the latter can be the proper subject of scientific inquiry (Cic-
cone 1999, 70).10
The data from which the Smithian argument starts are the natural rates
of wages, profits, and rents that, sectoral specificities apart, depend mainly
on the conditions of prosperity of the economic system under scrutiny, its
“advancing, stationary, or declining condition” (WN I.vii.1). The natural
price of (re)production of the various commodities derives from the sum-
mation of these three elements. The natural price is therefore a magnitude
that is not immediately formed in the market but that, given some appro-
priate conditions, may come true in the market. Indeed, the natural price
constitutes a sort of a floor for the market price in the sense that the latter
cannot remain for long below the former without seriously jeopardizing
the reproduction of the commodity in question:
The competition of the different dealers obliges them all to accept
of [the natural price], but does not oblige them to accept of less.
. . . The natural price, or the price of free competition, . . . is the
lowest which can be taken, not upon every occasion, indeed, but for
any considerable time together. . . . [It] is the lowest which the sellers
can commonly afford to take, and at the same time continue their
business. (WN I.vii.11, 27)
The theoretical importance of natural prices consists in providing a guide
to the theorist for explaining the dynamic path followed by market prices:
“The natural price, therefore, is, as it were, the central price, to which the
prices of all commodities are continually gravitating. Different accidents
may sometimes keep them suspended a good deal above it, and sometimes
force them down even somewhat below it. But whatever may be the obsta-
cles which hinder them from settling in this center of repose and conti-
nuance, they are constantly tending towards it” (WN I.vii.15).
To study the genesis of market prices and the existing relations between
market prices and natural prices, Smith introduces the concept of effec-
tual demand, that is, “the demand of those who are willing to pay the
natural price of the commodity.” It is to be stressed that the relationship
10. Ricardo (1951, 91–92) clearly states that the focus of his analysis is only natural magni-
tudes: “Having fully acknowledged the temporary effects which, in particular employments of
capital, may be produced on the prices of commodities, as well on the wages of labour, and the
profits of stock, by accidental causes, without influencing the general prices of commodities,
wages or profits, since these effects are equally operative in all stages of society, we will leave
them entirely out of consideration, whilst we are treating of the laws which regulate natural
prices, natural wages and natural profits, effects totally independent of these accidental causes.”
Salvadori and Signorino / The Classical Notion of Competition 159
between the quantity brought to the market and the effectual demand
determines only the market price of a commodity and not also its natural
price.11 Moreover, “demand” and “supply” are treated by Smith as given
quantities and not as functional relationships between price and quantity
characterized by well-defined formal properties, as they would be in the
neoclassical theory (Garegnani 1983; Aspromourgos 2009, 83–84).12
Given the unplanned nature of market economies, at the end of a pro-
ductive cycle, entrepreneurs may not face in the market a demand able to
absorb the whole of their production at the natural price (at least). This
requires the specification of an adjustment mechanism powerful enough
to bring about effective convergence to a situation in which the produced
quantity coincides with the effectual demand: in the absence of such a
mechanism, natural prices may not constitute a reliable guide to explain
the movements of market prices.13
In short, the adjustment mechanism envisaged by classical authors is as
follows. At the end of a productive cycle, the entrepreneur brings to the
market a given quantity of produced commodity resulting from the produc-
tion decisions taken at the beginning of the cycle just concluded. Of course,
this quantity cannot be modified to adjust to the demand actually encoun-
tered on the market. Thus the adjustment variable is constituted by the com-
modity’s selling price. Smith assumes that, in the presence of a gap between
production and effectual demand, a sort of auction starts among the agents
that happen to be on (what we today would call) the long side of the market:
such agents are prepared to offer higher and higher prices (in case of excess
demand) or lower and lower prices (in the case of excess supply).
Once the market price of any commodity happens to be different
from its natural price, this causes an imbalance in the distributive sphere
in the sense that the remunerations of those people who have contributed
11. See Ricardo’s (1951, 382) rejection of the opinion that price depends solely on the
proportion between these two quantities.
12. Differences between the classical and the neoclassical theories of value and distribu-
tion have been emphasized by such authors as Krishna Bharadwaj (1978), Alessandro Ronca-
glia (1978), and Pierangelo Garegnani (1984). Nonetheless, historiographical controversies
are still very much alive: see Blaug 1999 and 2009 versus Kurz and Salvadori 2002 and 2010.
13. This consideration may explain Ricardo’s (1951, 90; emphasis added) emphasis on the
effectiveness of the adjustment mechanism: “When we look to the markets of a large town, and
observe how regularly they are supplied both with home and foreign commodities, in the quan-
tity in which they are required, under all circumstances of varying demand . . . without often
producing either the effect of a glut from too abundant a supply, or an enormously high price
from the supply being unequal to the demand, we must confess that the principle which appor-
tions capital to each trade in the precise amount that is required, is more active than is gener-
ally supposed.”
160 History of Political Economy 45:1 (2013)
14. However, classical economists were perfectly aware of the existence of profit and wage
rate differentials. For a modern treatment, see Kurz and Salvadori 1995, chapter 11.
Salvadori and Signorino / The Classical Notion of Competition 161
est at which he is likely to sell them for any considerable time; at least
where there is perfect liberty, or where he may change his trade as
often as he pleases. (WN I.vii.4–6; emphases added)
The above shows that Smith devotes much care to determining natu-
ral values and to the gravitation process of market magnitudes to their
natural counterparts. The same cannot be maintained as regards the
question of market price determination, particularly when the market is
not in a situation of long-period equilibrium. Taking stock of Smith’s
sparse hints on this subject, it is possible to point out what follows.
First, in those markets in which competition is not free (e.g., because
of legal monopoly and/or the presence of a guild, a collusive agreement,
a law or a rule that somehow prevents economic agents allocating their
resources in the sector they prefer) or where there are industrial secrets,
entrepreneurs voluntarily limit the produced quantity so that the market
is left understocked and the market price stays artificially high:
The exclusive privileges of corporations, statutes of apprenticeship,
and all those laws which restrain, in particular employments, the com-
petition to smaller number than might otherwise go into them, have
the same tendency, though in a less degree. They are a sort of enlarged
monopolies, and may frequently, for ages together and in whole classes
of employments, keep up the market price of particular commodities
above the natural price, and maintain both the wages of the labour and
the profits of the stock employed about them somewhat above their nat-
ural rate. (WN I.vii.28)
Conversely, where competition is free and industrial secrets absent,
price undercutting starts as soon as at least two competitors are present in
the market. This process is amplified by increasing the number of com-
petitors, since this fact makes the establishment of a collusive agreement
more unlikely:
The quantity of grocery goods, for example, which can be sold in a
particular town, is limited by the demand of that town and its neigh-
bourhood. The capital, therefore, which can be employed in the gro-
cery trade cannot exceed what is sufficient to purchase that quan-
tity. If this capital is divided between two different grocers, their
competition will tend to make both of them sell cheaper, than if it
were in the hands of one only; and if it were divided among twenty,
their competition would be just so much the greater, and the chance
162 History of Political Economy 45:1 (2013)
get workmen, and thus voluntarily break through the natural combina-
tion of masters not to raise wages. (WN I.viii.11–12, 17)
In the following section we show how Marx draws on and develops
these elements of Smith’s treatment of market prices.
15. Marx’s treatment of competition in this passage echoes James Steuart’s notion of double
competition. Marx was well acquainted with the work of Steuart, with whom he often took issue
(Denis 1999). On Steuart’s notion of double competition, see Menudo and Tortajada 2009.
164 History of Political Economy 45:1 (2013)
We claim that the metaphor of the two armies that, at one and the
same time, are engaged in fighting one another and in their own ranks,
coupled with the suggestion that the result of the battle is eventually
decided by the interplay of these two levels of fighting, paves the way to
an interesting analytical intuition. In our view, Marx’s rhetoric foreshad-
ows the modern notion of a mixed strategy equilibrium: the outcome of
market competition need not be univocally determined, even if optimal
(mixed) strategies are.
To clarify his thought, Marx goes on to provide a concrete example.
Marx’s choice of a raw material market for this didactic purpose is illumi-
nating. In the market of a consumption good it is quite obvious to assume
a multitude of atomistic buyers. In such a case, competition among buy-
ers would be reduced to their reservation prices and, eventually, described
through a demand curve. It may not be so in the case of a raw material
market, where the number of buyers may exceed that of sellers, and, in
some cases, it is even possible to reverse the image of atomistic buyers to
that of atomistic sellers. Marx’s example starts with the analysis of what,
in modern terminology, is called a sellers’ market: “Let us suppose that
there are 100 bales of cotton in the market and at the same time purchas-
ers for 1,000 bales of cotton” (21). The fact that the demand is many (ten!)
times greater than the supply is very likely to be intentional: if there were
100 bales and purchasers for 110, conditions would have not been, in
Marx’s opinion, those of a sellers’ market. On the contrary, 100 to 1,000 is
considered enough to obtain that
the cotton sellers, who perceive the troops of the enemy in the most vio-
lent contention among themselves, and who therefore are fully assured
of the sale of their whole 100 bales, will beware of pulling one another’s
hair in order to force down the price of cotton at the very moment in
which their opponents race with one another to screw it up high. So, all
of a sudden, peace reigns in the army of sellers. They stand opposed to
the buyers like one man, fold their arms in philosophic contentment and
their claims would find no limit did not the offers of even the most
importunate of buyers have a very definite limit. (22)
Obviously, the ratio of 1 to 10 is, in itself, neither a necessary nor a suf-
ficient condition. This is not the place to find a necessary and sufficient
condition in general, yet an attempt to pinpoint the elements required for
such a condition can be made with the help of a simple symbolism. This is
attempted in a very special case in the appendix. Going back to the exam-
Salvadori and Signorino / The Classical Notion of Competition 165
ple, Marx continues by introducing the buyers’ market: “It is well known
that the opposite case, with the opposite result, happens more frequently.
Great excess of supply over demand; desperate competition among the
sellers, and a lack of buyers; forced sales of commodities at ridiculously
low prices” (22). Marx’s text reveals that, for him, the buyers’ market and
sellers’ market are not contiguous in the sense that between them there is
something, but apart from the metaphor of the two armies, his readers are
just left with the obvious remark that “in the same proportion in which
[competition among the sellers] decreases, the competition among the
buyers increases. Result: a more or less considerable rise in the prices of
commodities” (22).
The Marxian text continues by introducing long-period considerations,
that is, the gravitation of market prices toward prices of production (here
Marx uses the expression costs of production) as a consequence of capital
migration from (into) those sectors where market prices are below (above)
costs of production. Yet in Marx’s view, market prices are not to be dis-
missed lightly as theoretically insignificant. Marx, in fact, goes so far as to
claim that the typical market outcome is a market price above or below
costs of production, while the equality between the two should be consid-
ered an exception:
The determination of price by the cost of production is not to be under-
stood in the sense of the bourgeois economists. The economists say that
the average price of commodities equals the cost of production: that is
the law. The anarchic movement, in which the rise is compensated for
by a fall and the fall by a rise, they regard as an accident. We might just
as well consider the fluctuations as the law, and the determination of the
price by cost of production as an accident—as is, in fact, done by cer-
tain other economists. But it is precisely these fluctuations which,
viewed more closely, carry the most frightful devastation in their train
and, like an earthquake, cause bourgeois society to shake to its very
foundations—it is precisely these fluctuations that force the price to
conform to the cost of production. In the totality of this disorderly
movement is to be found its order. In the total course of this industrial
anarchy, in this circular movement, competition balances, as it were,
the one extravagance by the other. (24)
The reader might think that the elder Marx, equipped with an improved
understanding of the classical notion of prices of production and with a
more mature version of his own theory of labor-value, would not have
166 History of Political Economy 45:1 (2013)
endorsed the foregoing analysis by the young Marx. We think that this is
not the case, as witnessed by book 3, chapter 10, of Capital (Marx [1894]
1909). This chapter, bearing the title “Compensation of the Average
Rate of Profit by Competition. Market Prices and Market Values. Surplus-
profit,” is located in part 2, where Marx is confronted with the (insur-
mountable) problem of reconciling the origin of profit from surplus value
with a uniform rate of profit and a uniform rate of surplus value among
sectors. This is not the place to provide a thorough assessment of this
chapter. It suffices to note the following.
After identifying in II.X.14 the conditions to be met in order that “the
prices at which commodities are exchanged with one another may cor-
respond approximately to their values,” Marx adds in II.X.15: “[The
fact that] the commodities of the various spheres of production are sold at
their value implies, of course, only that their value is the center of gravity
around which prices fluctuate, and around which their rise and fall tends
to an equilibrium.” This sentence has been often quoted in the modern
literature on gravitation. However, it is not clear whether Marx thinks that
the price is unique at each moment of time or, rather, that there is a con-
stellation of prices at each moment of time. The difference is substantial.
If sellers and buyers follow mixed strategies instead of pure strategies,
there is clearly a constellation of prices at each moment of time. Marx also
identifies two simple cases. In the first “demand is so strong that it does
not let up when the price is regulated by the value of commodities pro-
duced under the most unfavorable conditions” (II.X.16); in this case these
conditions determine the market value. In the second, “the mass of the
produced commodities exceeds the quantity which is ordinarily disposed
of at average market-values” and, as a consequence, “the commodities
produced under the most favorable conditions regulate the market value”
(II.X.16). Marx is more interested in the result of this process than in the
analysis of less simple cases.16 However, in II.X.51 he claims:
That side of competition, which is momentarily the weaker, is also that
in which the individual acts independently of the mass of his competi-
tors and often works against them, whereby the dependence of one
16. “No matter what may be the way in which prices are regulated, the result always is the
following: 1) The law of value dominates the movements of prices, . . . 2) The average profit
which determines the prices of production must always be approximately equal to that quan-
tity of surplus-value, which falls to the share of a certain individual capital in its capacity as
an aliquot part of the total social capital” (II.X.17–18). (All references to Capital give part
number, chapter number, paragraph number.)
Salvadori and Signorino / The Classical Notion of Competition 167
upon the other is impressed upon them, while the stronger side always
acts more or less unitedly against its antagonist. If the demand for this
particular kind of commodities is larger than the supply, then one buyer
outbids another, within certain limits, and thereby raises the price of
the commodity for all of them above the market-price, while on the
other hand the sellers unite in trying to sell at a high price. If, vice
versa, the supply exceeds the demand, some one begins to dispose of
his goods at a cheaper rate and the others must follow, while the buy-
ers unite in their efforts to depress the market-price as much as possi-
ble below the market-value. The common interest is appreciated only
so long as each gains more by it than without it. And common action
ceases, as soon as this or that side becomes the weaker, when each one
tries to get out of it by his own devices with as little loss as possible.
(emphases added)
Here we find a clear echo of the argument used by the young Marx in
Wage-Labour and Capital. It is also clear that the price is not unique at
each moment of time: on the contrary, there is a constellation of prices at
each moment of time. This fact supports our claims that the process
needs to be analyzed under the assumption that buyers and sellers follow
mixed strategies instead of pure strategies.
17. An English translation of Bertrand’s text, originally in Journal des Savants volume 48,
pages 499–508, is provided in the appendix of Magnan de Bornier 1992.
168 History of Political Economy 45:1 (2013)
18. In Bertrand’s wording “without limits,” but this is only because in Cournot’s original
example the marginal cost is zero. This is not the place to discuss whether Bertrand’s interpreta-
tion of Cournot is well grounded or whether Cournot actually used prices instead of quantities
as strategic variables: see Magnan de Bornier 1992 and 2001, Dimand and Dore 1999, and Mor-
rison 1998 and 2001.
Salvadori and Signorino / The Classical Notion of Competition 169
sellers and buyers. It is certainly not difficult to extend the Bertrand com-
petition model to investigate the case in which there is a multitude of
atomistic sellers described through a supply curve confronted with a given
number of buyers, each defined by their reservation price (possibly con-
stant and uniform) and purchasing power. Generalization to a symmetrical
case in which a number of sellers with their costs and selling capacities are
confronted with a number of buyers with their reservation prices and buy-
ing capacities is certainly less obvious. Second, Bertrand competition
theorists have analyzed quite extensively the case of duopoly with constant
marginal cost. Few contributions have investigated the oligopoly (see De
Francesco and Salvadori 2010 and the literature cited therein). When there
are more than two competing firms, many changes are needed. In the case
of two firms, any firm can either undercut the other or avoid doing so. In
the case of three or more firms, any firm can either undercut all other firms
or just some of the firms and not others, or none of them. For example, in
the case in which there are two (either equal or not) large firms and a
smaller firm, the latter can avoid high prices so that the two large firms are
not interested in undercutting it when they undercut each other at higher
prices. The small firm can take advantage of this protection from competi-
tion with larger firms (at high prices) to obtain a larger rate of profit (see
De Francesco and Salvadori 2010, theorem 1(c)). The analysis provided in
the appendix may give an idea of the problems involved.
5. Final Remarks
In this article we attempted to assess the classical notion of free competi-
tion in comparison with the Walrasian notion of perfect competition. We
showed that the latter is plagued with some logical difficulties that drasti-
cally reduce its explanatory power to equilibrium situations. Such difficul-
ties are absent in the classical notion of competition, which, contrary to
the Walrasian one, is not based on any kind of price-taking assumption.
Yet the former also displays some unsatisfactory aspects. In particular,
while the classical authors extensively investigated long-period, natural
values and gravitation, they were more sketchy on market price determi-
nation in situations of market disequilibrium. To fill this lacuna we ana-
lyzed Smith’s and Marx’s views on competition between buyers and sell-
ers. We claim that, taking inspiration from the modern theory of Bertrand
competition, it is possible both to render Smith’s and Marx’s hints for-
mally precise and to provide interesting new questions for modern Ber-
trand competition theorists.
Salvadori and Signorino / The Classical Notion of Competition 171
Appendix 1
Let N be the number of buyers. Their reservation price is pb. Let B1 ≥
B2 ≥ … ≥ BN be the different quantities of cotton they want to buy and
let B = B1 + B2 + … + BN. Similarly, let M be the number of sellers and c
their reservation price. Let S1 ≥ S2 ≥ … ≥ SM be the different quantities
of cotton they want to sell and S = S1 + S2 + … + SM. Let us assume that
c < pb (the case in which c ≥ pb requires more accurate analysis) and that
there are no buyers with a reservation price lower than pb and no sellers
with a reservation price higher than c (once again, a more accurate analy-
sis would be required otherwise).
If S < B2 + … + BN, that is, if all buyers but the largest one are will-
ing to buy more than the existing amount of cotton, buyer 1 could be
excluded from the purchase and, as a consequence, any other buyer 2,
3, . . . , N could be excluded too. Overbidding among buyers leads the
price of cotton to rise to pb. Therefore the best strategy for each buyer is
to express a demand for cotton at her reservation price and the best strat-
egy for each seller is to quote the price pb. On the contrary, if B > S >
B2 + … + BN, that is, if all buyers but the largest one are willing to buy
less than the existing amount of cotton even if all buyers are willing to
buy more than the existing amount of cotton, buyer 1 knows that she
will certainly buy some cotton. In the limiting case in which all buyers
2, . . . , N have purchased their desired amount of cotton, buyer 1 is a
monopsonist in relation to the sellers who have not sold their cotton. Let
pm be this monopsony price. Obviously, pm = c.19 Clearly, if buyers 2,
3, . . . , N quote price pb for cotton, buyer 1 will quote price pm < pb. But
if buyer 1 quotes price pm for cotton, (some of) the other N − 1 buyers will
outbid her instead of quoting pb. Therefore buyer 1 will overbid on them,
instead of quoting pm. And so on, until the price goes up so much that
buyer 1 will prefer again to quote price pm = c and buy only S – (B2 + …
+ BN ) units of corn. And so on and so forth. In this situation, sellers cannot
“stand opposed to the buyers like one man” and “fold their arms in philo-
sophic contentment”: they must fight each other to sell at a higher price.
Similarly, if B < S2 + … + SM, undercutting among sellers leads the price
of cotton to drop to c. Therefore, the best strategy for each seller is to quote
her reservation price and the best strategy for each buyer is to express a
demand for cotton at price c. On the contrary, if S > B > S2 + … + SM, no
19. Note that if buyers with a reservation price larger than c exist, the monopsony price is
larger than c.
172 History of Political Economy 45:1 (2013)
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