Oligopoly
Oligopoly is the form of imperfect competition which obtains when sellers are few in number and any one of them is of such size that an increase or decrease in his output will appreciably affect the market price. The commodity produced by the sellers may be standardized or differentiated; the size of each seller's output in relation to the total supply is the test. In such a situation, as has been said, the seller will consider the probable effect of variations in his output upon the price and adjust his production accordingly. He will consider, also, the probable reaction of his competitors to variations in his price, and may forego the expansion in sales which he might obtain by setting his price at a lower level if he believes that they will shortly meet or undercut it. Since there are many fields in which sellers are few in number, oligopolistic competition is of common occurrence. A comparable situation, oligopsony, may obtain on the buyers' side of the market.
Cutthroat or Destructive Competition
Competition is said to be cutthroat or destructive when the existence of idle capacity and the pressure of fixed charges lead sellers successively to cut prices to a point where no one of them can recover his costs and earn a fair return on his investment. Competition which threatens to produce this result is called price warfare. Price warfare could not occur under perfect or pure competition, since the output of each seller would be so small a part of the total supply that it would be unnecessary for him to cut his price in order to increase his sales. There can be no question, however, that price wars do occur under oligopoly; that, in a metaphorical sense, at least, the throats of business enterprises are cut; that these legal entities are injured or destroyed; and that investment values suffer in the process. The railroad rate wars of the sixties and the seventies of the nineteenth century are a case in point. The difficulty with the concept lies in the ease with which it lends itself to abuse. It cannot be said with certainty that a series of price cuts is destructive unless someone has made an impartial analysis of the costs of the price cutters, determined what rate of return it is fair for them to receive, and discovered that the cut prices will not cover the legitimate costs plus the fair return. The terms cutthroat and destructive, however, are frequently applied, in the absence of any such investigation, to ordinary competition in price. Thus employed, they can have no more weight than any other epithet.
Predatory and Discriminatory Competition
Competition is said to be predatory when one seller cuts his price for the sole purpose of eliminating another, discriminatory when he confines the cut to a portion of his sales that competes with those made by another. He may cut prices uniformly, deliberately sacrificing present
earnings in an effort to obtain future monopoly power and profit. He may discriminate among localities, temporarily cutting his price in one area while he maintains it in others, raising it again when he has eliminated his local rivals. He may discriminate among products, temporarily cutting his price on one brand while he maintains it on others, dropping the fighting brand when it has served its purpose. There can be no question that such tactics have been frequently employed. But this concept, too, presents difficulties. The test of predation is intent, hut the price cutter's purpose is known only to himself, is only to be inferred by others. In cases of flagrant discrimination the inference may be plain; in cases of general price reduction it is less so. The competitor who finds it difficult to meet another's price may well believe that his rival intends to eliminate him, but this conviction cannot be taken as sufficient proof of such intent. Every act of competition is designed to attract business to one competitor rather than another and, to that extent, to eliminate the latter from the market. The line beyond which such activity is to be denounced as predatory is not an easy one to draw.
Unfair and Fair Competition
The concept of unfairness and fairness in competition has made its appearance in the opinion of the business community, in formal codes of business ethics, in common law, in the Federal Trade Commission Act, in the Commission's decisions, in the submittals presented to the Commission by trade practice conferences, in the National Industrial Recovery Act in the codes approved by the National Recovery Administration, and in the unfair trade and fair trade laws recently enacted by the legislatures of a majority of the American States. The concept is thus ethical and legal rather than economic. Its precise content is indeterminate, since opinions, codes, laws, and decisions differ one from another and each of them may be modified with the passage of time. It would be possible in economics so to define unfair competition as to include within the concept all of those methods and only those methods which give one competitor an advantage or place another at a disadvantage which has nothing to do with their comparative efficiency in the production and distribution of goods. But relevance to efficiency cannot be taken as the accepted test of fairness, since measures involving competition in efficiency have sometimes been condemned and measures unrelated to efficiency approved. In fact, no such objective principle has been employed to distinguish between those methods which are said to be unfair and those which are said to be fair.