Price-Quality Competition in Oligopolistic Interdependence

Abstract

The nature of product differentiation in Joan Robinson’s Economics of Imperfect Competition remains unclear fifty-odd years after its publication. Her thinking was shaped by the cost disputes in the British literature of the 1920s that reacted to the recently formalized analysis of the firm in pure competition. Because, it was asserted, decreasing costs were experienced in industry more frequently than not, the limits to the size of the firm must be dictated by a declining demand curve, not rising marginal cost and horizontal demand functions. As Sraffa (1926) argued explicitly in the most influential article in the debate, the analysis of the firm’s decision-making must be reformulated in a universal theory of monopoly. Implicitly, the decreasing cost advocates urged that if the inspired fuzziness of Marshal-lian economics had to be formalized, the monopoly model, not that of pure competition, was the more relevant tool. Robinson’s debt to Sraffa is amply recorded in her book.¹