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
