Essential Schumpeter: The Nature of Competition

Welcome to the essential ideas of Joseph Schumpeter. As he so often did, Schumpeter

challenged the orthodoxy surrounding the concept of competition. In his view,

competition wasn't about the number of firms in a market, but rather how easily

new firms could enter the market and displace existing firms. For example:

Two islands are known for a cool treat – kiwi popsicles. On the eastern island there

are ten firms selling kiwi popsicles; on the western island only two large firms

sell kiwi popsicles. traditional economics tells us that the eastern

island is more competitive than the western island. But let's take a closer

look: On the eastern island, the government issues licenses for a certain

number of firms to produce a preset number of kiwi popsicles. Each firm goes

through a lengthy and costly application process, taking up to several years to

complete. There are also lengthy and expensive

regulatory reports that have to be filed with the government every year, adding

even more costs. And the government prohibits any foreign kiwi popsicles

from being imported to the island. The result of these protections is that the

firms able to obtain a license for Kiwi popsicles are able to charge higher

prices. Meanwhile on the western island, no restrictions are placed on the number

of firms or the importing of kiwi popsicles so new firms are able to

easily enter the market and compete with the existing two firms. This openness to

competition forces the two existing firms to keep prices low and to innovate

with new products - including different flavors and services like home delivery -

in order to stay ahead of any would-be competitors instead of worrying about

the number of existing firms and their market, Shumpeter realized we

should worry about barriers that prevent or limit new firms and entrepreneurs

from entering a market, and innovating and competing for more information on

Joseph Schumpeter visit EssentialSchumpeter.org and to learn about more

essential scholars visit EssentialScholars.org