THE MAIN MODELS OF THE COMPETITIVE MARKET

THE MAIN MODELS OF THE COMPETITIVE MARKET

 

 

 

             believes that business firms constantly face highly competitive global markets, diverse customer expectations, and rigid market demands. To gain competitive advantage, business firms must be able to produce better outputs and distribution channels. This means that companies must innovate in a more scaleable and efficient manner than their competitors ( 2005). points out that the major function of the entrepreneurs is to innovate, not just by crafting new inventions, but also by discovering better means of production, new products and forms of organizations; opening up of new markets, acquiring new sources for raw materials, reorganizing the industry, and encouraging the manpower to suggest changes while delivering new and better outputs (2002;  1991). To cite some examples of business innovations, General American Life Insurance Company in Cupertino, California, has selected Chordiant’s Software Incorporated’s eBusiness infrastructure software as part of the customer service e-commerce program to improve customer satisfaction. The program will substantially reduce operating costs, enhance customer tracking while streamlining transactions, and act as a foundation for future e-commerce efforts (2000). Also, Regal Wares as reported by  (2000) plans to use faster bread machines as a way to step up electric sales. Regal Ware is the first company to introduce a bread machine that bakes a loaf of bread in under an hour, an innovation that has helped the company garner a strong position in bread machine sales ().

           

            model has been praised for its study of innovation and how it helps business firms to deal with economic, organizational, technological, and institutional changes. His model recognizes the capacity of change in altering market systems. He also conceived the innovative role of the entrepreneur in a broad context by tackling innovation in processes, products, sources of raw materials, markets, and organizational culture. Schumpeter’s model has been very influential in making innovation a central process for economic growth as it drives rise of technologies, enhancement of skills, improvement in economic processes, and consistent accumulation of important market knowledge (2005). However,  (2002) argues that failed to achieve a satisfactory and conclusive theory explaining economic change. His theory is largely focused on the role of the entrepreneur and the business cycle which is characterized by change, crisis and success. His arguments failed to depart from the entrepreneur as a potent force of economic evolution to encompass the larger scale of the evolutionary economic process ().

 

            The Neoclassical Model underscores the importance of individual welfare, utility and equilibrium in the midst of a perfectly competitive capitalist economy (2004). The neoclassical model argues that individuals continuously pursue maximization of value from economic transactions making every economic phenomenon dependent on the behavior of individual consumers (2002).  (2000) claims that the neoclassical perspective postulates that in the competitive market, terms from the marketplace prevail and the consumer is the “king” or “queen” while the producer acts as servant (). Consumers obtain benefits from consuming goods and services and they attempt to maximize this benefit by increasing purchase and consumption until the benefit that they gain is equal to what they have given up to get it. Corollary to this, people offer their labor to business firms by making sure that the wage they would get from the company is equal to the opportunity for leisure that they would lose because of work. Likewise, business firms try to maximize their profits by increasing the volumes of products and goods that they sell so as to ensure that these goods would generate income equivalent to the number of units produced and sold. One example is when one consumer wants to buy a car for a certain price. Other consumers may also feel the need to buy cars at the same price but car producers would not manufacture the same cars that these consumers want. In order to attain equilibrium wherein the consumers would get what they want and the producers can earn profits, the consumers would bid up the price of the car until some producers are eliminated and the target price prevails. Another example is when a firm decides to lay off a worker after meticulously analyzing the gains that the company gets from the lay off and the costs incurred from the decision (2002).

            The neoclassical model’s advantages come in two forms: its ability to recognize economic agents (consumers, people in a business firm or household) as rational beings who can examine their economic needs, do something to address them, and naturally try to pursue better gains from consumption through strategies that promote equilibrium; and in its emphasis on the social system wherein consumers and firms engage in information gathering, bargaining and interconnected decisions to as to avoid conflict and ensure benefits for all (2002). However, the neoclassical competitive market model is not spared from criticisms. Many critics said that the neoclassical model is unrealistic. It merely assumes that equilibration takes place naturally as the result of rational market forces. Such belief insufficiently analyzes the dynamic process of wealth formation through discovery. Neoclassical economist attempts to extend, instead of modify the scope of the model’s standard assumptions in light of market ignorance. This means that market ignorance is dealt with in terms of the costs and benefits of removing it (2000 ). The neoclassical model also puts too much focus on individuals in an economy and failed to encompass other elements of the economic system such as natural capital/resources and the tendency of business firms to consider wider social issues ( 2007).  

           

            F.A. Hayek’s Model states that competitive mechanism in the economy is not dependent on normative standards – rather on the market ability of solving the knowledge problem (2005). Hayek believes that all participants in the market possess incomplete knowledge. The free competitive market attempts to integrate the dispersed market knowledge through the price structure and competition. The price system becomes a significant basis for consumers to acquire the necessary information they would need to modify their economic interests and decisions. For example, a tin mine in Africa is subject to demise and has an effect on the sufficiency of tin supply. The decrease in tin supply would connote higher prices to be paid by the bronze industry. Many bronze manufacturers would be encouraged to economize on their use of tin and production of goods using the material. Economic participants will purchase lesser volumes of tin-based products due to the higher price or accumulate the the essential tin and tin-based products that they would need. Furthermore,  claims that competition helps the market to coordinate dispersed knowledge in the market system. Competition drives producers to monitor and assess the market and other firms so as to make the necessary strategies in cost cutting, productivity efforts and elimination of waste ( 2005).  further postulates that the integration of individual goals relies heavily on certain abstract rules like customs and laws (2005). Following a rule serves the purpose of allowing people to know what they can expect from others. It connotes a condition of possessing a piece of information and being able to perform an intelligent operation out of it. Knowing a rule restrains the need to access other extra information. Hayek argues that by drawing upon these rules, economic actors avail themselves of the collected wisdom of an evolving society, and are thereby enabled to initiate socio-economic activity (1995).

           

            Hayek’s theory gives importance to the capacity of society to survive through the role of societal code of conduct and laws (private property), the market’s ability to pass coded information across the market system through price and competitive processes, and the practice of freedom – three elements that make society static and evolutionary.  firmly argued that each individual in the economy possesses certain knowledge that they use to adjust economic decisions and ensure continuous economic participation. He was also instrumental in advancing freedom to participate in the economic system while observing social rules or code of conduct in the process. Individuals follow rules so as not to interfere with other individuals’ knowledge and economic activities ( 2001).  (1985) states that there is a flaw in Hayek’s view of social conduct. While it is true that the preservation of a market economy depends upon a widespread acceptance of the rules of private property, this proposition only explains why people should want other people to observe the rules of just conduct, not why they should regard them as binding upon themselves. This is due to the fact that sometimes people can improve their opportunities by breaking the rules or considering crime as a lucrative occupation. Furthermore, Hayek failed to recognize that the course of human events is not fixed but can be changed fundamentally by the choices men make as citizens and rulers, and men can turn to the natural law for guidance in choosing among different courses of action ().

           

            Amartya Sen’s contributions on economic theories include ideas on social choice, welfare and poverty indexes, and empirical studies of famine. He points out that rational individuals have one preference ordering, and when that need arises reflects his interests, represents his welfare, summarizes his idea of what                                                            should be done, and describes his actual choices and behavior. He also defines a generalized equally distributed equivalent income as that income level which is if shared by the entire population, would produce the same value with that value of the actual distribution of income. Finally, Sen states that for various reasons, certain societies or certain populations suffer a decline in their ability to command food and thus famine occur. This is primarily due to the consistent struggle of individuals to maximize their satisfaction from consumption (2000).

 

            Sen was successful in explaining the relationship between economic system, income disparity, poverty and famine. He was able to discuss the interrelatedness of the natural market tendency for individuals to work and consume, the possibility of unequal capacity, and the consequences of insufficient economic ability. His ideas are instrumental for social policy on hunger and equal income distribution ( 2000). The most prominent flaw in Sen’s theory is his motivating interest on poverty (through his ideas on capability) while officially advocating inequality. Poverty and inequality are separate phenomena since everyone can be equally poor while a monetary gap between millionaires and billionaires still exists. Sen was not able to dig deeper into the relationship or lack thereof, of poverty with inequality ( 1994).

 

 

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