Effects of competition on profit margins from a Post Keynesian perspective
Résumé
The interdependence of competition and profit margins is one of the most
important features of industrial economics. According to mainstream economics,
intense market competition results in smaller profit margins. Long-term
profits
are contingent on competition and market imperfections; perfect competition
presumably reduces profits to zero in the long run (excluding normal profits
allocated to managerial compensation).
This relationship between competition and profit margins is also an important
theme in Post Keynesian economics. From Joan Robinson’s Economics of Imperfect
Competition to Kalecki’s analyses of the degree of monopoly, Post Keynesian
economists have long been interested in this aspect of economic theory. There is
however no unified Post Keynesian view of competition and its effect on profit
margins, and we can, from a historical perspective, identify two main strands of
Post Keynesian thought, each relying on a specific theory to determine profit
margins. Based on the ‘imperfect competition and degree of monopoly principle,’
the first branch considers that profit margins are the result of market structure
(market imperfections). In this view, as in the theory of monopoly capitalism (see
Moudud, Bina, and Mason 2013), profit margins thus positively correlate with
competition imperfections and degree of monopoly. Rooted in the ‘investment
financing tradition,’ including the works of Alfred Eichner and Adrian Wood, the
second branch makes a direct connection between profit margins and internal
financing requirements for investment. We consider this second view to clearly
represent Fred Lee’s economic thinking (see, for example, Lee 2013b). A comparison
of the two Post Keynesian branches shows that the first position closely
resembles what later became the mainstream view on the relation between competition
and profit margins (notably with the emergence of the so-called
structure-conduct-
paradigm in the 1960s and 1970s, which remains an influential theoretical
framework for industry-competition
policies). Stated succinctly, in this theory, the
tougher the competition, the smaller the profit margins.
Nevertheless, empirical testing of this theory poses certain difficulties. In fact,
many empirical studies fail to validate the direct link between the degree of competition
(regardless of the chosen criterion) and profit margins. Such studies often report weak or even paradoxical results, be it at the sectoral or macroeconomic
level. These unexpected results can, however, be explained from the
‘investment-financing’
theory of profit margins. Based on the theories of Alfred
Eichner (1973, 1976) and Adrian Wood (1975), this second branch offers an
explanation for why profit margins are independent of the degree of competition
in the market. In conjunction with his two-curve
diagram, Adrian Wood’s analysis
(developed in his 1975 book, A Theory of Profits) enables us to show why
competition does not affect the determination of profit margins. Therefore, the
second strand’s main contribution is its emphasis on the fundamental role of
internal financing in capitalist economies, which is the missing link in industrial
economics.