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The Evolution of Monopoly Theory: Classical and Neoclassical Perspectives

  • Paper Type: Free Essay
  • Wordcount: 1177 words
  • Subject: Business
  • Published: 03th March 2015
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The monopoly concept has been debated for long time in economic thought, evolving to the more formal neoclassical perspective from the understanding of market restrictions. Different thought has shaped the concept, leading to varied explanation of monopoly’s part in economic systems. This article illiterate these interpretations, indicating the works of popular economists such as, Irving Fisher [6], Adam Smith [10], Antoine Augustin Cournot [2] and Léon Walras [12] while also considering comments from modern scholars.

Neoclassical Views on Monopoly and Competition

Irving Fisher (1923) [6] stated monopoly as “absence of competition,” differentiating it with the neoclassical ideal of suitable competition. In this structure, monopoly highlights market inefficiency, as it excludes from the ideal allocation of resources that competitive markets assure. Neoclassical economists often show monopoly as the opposite of ideal competition, where deconcentrated decision-taking allows free exchange.

But critics states that this perspective overlooks the difficulties of practical transactions, where costs related to uncertainty, time and information asymmetry play an essential role. Modern economists insist that contention often includes institutional frameworks—such as vertical integration, resale price maintenance, tie-in sales, and—that do not match with the rigid prediction of ideal contention. These frameworks bring in flaws that neoclassical economics tend to overlook, even with their essential impression on market practice [4].

Moreover, the neoclassical economists often refer the classical fundamentals of laissez-faire, incorporates an irrational form of decentralization rather than an ideal competitive state. This increases questions about whether market behaviours, generally referred as monopolistic, should instead be seen as honest market adjustments rather than exclusion from competition [7].

Classical Theories of Monopoly: Ricardo, Smith and Their Critics

Figures like David Ricardo [9] and Adam Smith [10] who led the classical school of economics, handled monopoly differently. While Wealth of Nations of Smith is often considered as a critique of monopoly, his use of the word was wide, including various institutional and political restrictions rather than the current understanding of a single ruling firm. Smith related monopoly frequently with statutory protections, guild privileges, and exclusive trading rights than complete market supremacy by a firm.

On the other hand David Ricardo used the word “monopoly price” in a limited sense, used for product such as works of art and rare wines , where supply

Restriction dominated pricing rather than production costs. This implies that classical economists viewed it as a byproduct of specific institutional arrangements and did not develop a formalized theory of monopoly.

Léon Walras [12], a popular mathematical economist, states that classical economists lacked a precise theory of monopoly. He laid the foundations of formal monopoly theory by accrediting Antoine Augustin Cournot (1838) [2] and Jules Dupuit (1844, 1849) [5]. earlier economists criticized by Walras for their irregular use of the term, signified that they applied it to industries with restricted competition and surprisingly to ownership of resources such as land.

George Stigler (1982) [11] realigning the view that Adam Smith and his fellows did not improve a structured monopoly theory. He stated that Ricardo’s approach to monopoly was simplistic, focusing only on extreme cases of inelastic supply and Smith’s conceptual framework was primarily built around free competition. Stigler argued that classical economics treated complexities of monopoly as an anomaly rather than a central issue in market dynamics and largely ignored it. 

Market Restrictions and Industrial Developments

Some scholars’ states that the reduced of a classical monopoly theory can be contributes to historical perception. Economies of scale and large-scale industries characterized by high capital requirements were not yet dominant at the 18th century. Monopolies were generally related with government-sanctioned privileges, such as those regulated companies, granted to guilds, and joint-stock corporations at that time. As a result, classical economists concentrated more on these institutional monopolies than on monopoly as a market framework.

This historical perspective implies that Smith’s argument of monopoly was directed at legal limitations that limited market entry than at firms achieving domination through innovation. Smith acknowledged the persistence of high market prices in cases of limited competition—such as government-protected industries and land rents but not analysed through a formalized theoretical structure.

classical economists believed in the self-correcting nature of markets, suggested by an alternative interpretation. By highlighting long-term balance positions, they predicted that monopolistic theory was not permanent, and that competitive power would finally evacuate any undue market force. Modern economic analysis recognizes that significant entry barriers can lead to determined monopolies.

Reconciling Neoclassical and Classical Views

The progression of monopoly theory depicts a conversion from a policy-oriented and institutional approach to a more generalized, mathematical approach. Neoclassical economists looked monopoly in terms of trade and legal privileges.

Neoclassical economists seek to classify monopoly in association with ideal competition while limitations.

Modern industrial organization theory tries to incorporate elements of both perspectives to bridge the gap, addressing that monopoly force can stem from both strategic firm behaviour and market structure. Critics states that neither school fully addressed the difficulties of practical markets, where regulatory influences, strategic firm behaviour and irrational competition all shape market outcomes [1][8] 

Conclusion

With different traditions offering distinct interpretations and the classical approach Monopoly remains a competitive concept in economic view, as seen in the works of David Ricardo and Adam Smith, looked on institutional barriers and legal restrictions, while neoclassical economics highlighted the theoretical difference between ideal competition and monopoly. Scholars such as Walras and Stigler criticized the lack of a general monopoly theory in classical economics, yet historical condition states that Ricardo and Smith were more concerned with practical market limitations than with abstract market frameworks.

The proceeding debate over monopoly signifies the need for a refined understanding that includes institutional, strategic, historical dimensions. As markets continue to improve, the lessons from both neoclassical and classical approaches remain significant for understanding the difficulties of market competition and monopoly force.

References

  1. Blaug, M. (1997). Economic theory in retrospect (5th ed.). Cambridge University Press.1. https://doi.org/10.1017/CBO9780511805639
  2. Cournot, A. A. (1838). Recherches sur les principes mathématiques de la théorie des richesses [Research on the Mathematical Principles of the Theory of Wealth]. Hachette. (English translation: Macmillan, 1897). https://hope.econ.duke.edu/sites/hope.econ.duke.edu/files/Peirce%20%20Cournot%2018%20July%202013.pdf
  3. De Roover, R. (1951). Monopoly theory prior to Adam Smith. Quarterly Journal of Economics, 65(4), 523–526.
  4.  https://www.sfu.ca/~poitras/qje_de-roov_monop_51.pdf
  5. Demsetz, H. (1982). Barriers to entry. American Economic Review, 72(1), 47–57.
  6. https://www.researchgate.net/publication/4900738_Barriers_To_Entry
  7. Dupuit, J. (1844). On the measurement of the utility of public works. Annales des Ponts et Chaussées. (English translation: International Economic Papers, 1952).
  8. https://competitionandappropriation.econ.ucla.edu/wp-content/uploads/sites/95/2016/08/On-the-Measurement-of-the-Utility-of-Public-Works-p.-255-283.pdf
  9. Fisher, I. (1923). The making of index numbers: A study of their varieties, tests, and reliability. Houghton Mifflin.
  10. https://www.jstor.org/stable/1804546?seq=1
  11. Hovenkamp, H. (1989). The antitrust enterprise: Principle and execution. Harvard University Press.
  12. https://www.hup.harvard.edu/books/9780674027411
  13. Kurz, H. D., & Salvadori, N. (1995). Theory of production: A long-period analysis. Cambridge University Press. https://doi.org/10.1017/CBO9780511625770
  14. Ricardo, D. (1817). On the principles of political economy and taxation. John Murray. https://www.econlib.org/library/Ricardo/ricP.html
  15. Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations. W. Strahan and T. Cadell. https://www.econlib.org/library/Smith/smWN.html
  16. Stigler, G. J. (1982). The economists and the problem of monopoly. American Economic Review, 72(1), 1–11. https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1031&context=occasional_papers
  17. Walras, L. (1874–1877). Éléments d’économie politique pure, ou théorie de la richesse sociale. (English translation: Elements of Pure Economics, 1954).
  18. http://digamo.free.fr/walras96.pdf
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