Competition has an important role in the system of free market economy. In fact it is the basis of market development…Adam Smith was the first, who mentioned about competition in economic system in 1776 in his work “An Inquiry into the Nature and Causes of the Wealth of Nations”. Smith presented a decentralized, competitive field, which was not being regulated by the state, had many trivial competitors and where none of the participants had enough influence on the general indexes of the market.
In the second chapter of his work (of the principle which gives occasion to the Division of Labor) Smith speaks about a situation, where the participants of the competing field form their behavior based on their needs:”He(a man) will be more likely to prevail if he can interest their(other people) self-love in his favor, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer”[i].
In fact, Smith’s idea of competition theory leads to each subject making their profit as high as possible, as a result of which not only the market participant benefits but also the society in general. In this system free competition contributes to the reduction of production expenditures, optimizes the distribution of resources inside the economy and its branches.
Theoretically, the manifestation of the behavior suggested by Smith could lead to the increase of social result in general, if the system, where numerous trivial participants have no influence on the market system, worked. In practice, however, the competitive abilities of certain subjects are different, and a situation arises with the development of economy’s infrastructures where certain participants obtain a predominant role in the market due to their competing advantages and can affect both the market’s structure and social development in general.
Smith’s ideas on competition have been manifested in international trade theories. It was called “theory of absolute advantage”, which is based on the notion of “invisible hand” (Laissez-faire), according to which international trade is regulated through price factor, and certain products will be produced in those countries, where their production is more beneficial.Continuing Smith’s idea, David Ricardo formed the theory of “comparative advantage”, which is based not only on price factor and the regulation through it, but also the advantages of the parties incompetition (in this case countries)compared to other countries. This enables countries to search for alternatives for trade activities and take into consideration the experience, specialization and other factors that will result in comparative advantage in competition.
With the principles presented in his theory, Ricardo is close to the model and ideas of competing behavior presented by “the game theory”. The principles of “game theory” were first introduced by famous Merrill Flood, Melvin Dresher and Albert Tucker. Later these ideas were practically defined by an American mathematician John Nash. He presented the idea of the competition’s formation, taking into consideration not the tactics and logic of actions of certain subjects, but the behavior of the participants in the whole system. This theory is based on the following principle: “every participant acts considering the possible strategies of other participants”. A bright example of Nash’s theory is “the prisoner’s dilemma”, according to which each participant chooses the optimal option based on the other participant’s possible steps and logic of working.
Let us look at a competition situation, where there are two companies and each of them has two options for defining the price threshold, i.e. as “high” and “low”. In this case, the following behaviors are possible: both companies set “high”prices, both companies set “low” prices, and two more options, when one of them sets “high” prices, the other one “low”prices.
| The second company
| The third company
| The first company
|The profit of each
|The profit of the first company is 10 million
That of the second one is 1 million
| The first company
|The profit of the first company is 1 million, that of the second one is 10 million|| The profit of each
If both companies use rational logic and take into consideration the other’s behavior, the following scenario will be the case: if the first company sets high prices, then the other one also benefits from setting high prices, but if the first company sets low prices, then in this case too, the other company will benefit from setting high prices. As a result, in case of showing rational behavior in this competitive situation, both companies should set a high price threshold in order to get the maximum profit.
If according to the logic suggested by A. Smith every subject acts for their benefits and considers this option optimal, then according to Nash, the decision making process depends not only on one’s own benefits, but also on the certain behavior of other participants, which is demonstrated in the model suggested by him.
Thus, according to Smith’s approach, the theory of competition and the logic of competitive decision making have an absolutely “self-centered” nature, while D. Ricardo’s approach is more inclusive and takes into account the progress of competition and the participants’ behavior in a long term, as well as non-price factors of competition. In case of Nash, the competition struggle does not depend on the created conditions only. Not only the decisions of certain subjects are taken into account, but also their influence on each other.
[i] Adam Smith”An Inquiry into the Nature and Causes of the Wealth of Nations”
Chapter 2 “Of the principle which gives occasion to the Division of Labor”http://e-libra.ru/read/179321-.html
[ii] In this case, high prices from both companies can lead to the reduction of demand, thus decrease of profit.
- Адам Смит “Исследование о природе и причинах богатства народов” http://e-libra.ru/read/179321-.html
- Մարտիրոսյան Ա. Ռ. «Ռիկարդոյի «համեմատականառավելություններիտեսությունը» տնտեսագիտականմտքիէվոլյուցիոնառաջնահերթություններիսահմանմամբ»
Author: Hakob Hakobyan ©All rights are reserved
Translator: Liana Papyan