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Quotation of the Day…

… is from Ronald Coase’s 1991 Nobel Prize lecture:

In my 1937 article [“The Nature of the Firm“], I argued that in a competitive system there would be an optimum of planning since a firm, that little planned society, could only continue to exist if it performed its co-ordination function at a lower cost than would be incurred if it were achieved by means of market transactions and also at a lower cost than this same function could be performed by another firm.  To have an efficient economic system it is necessary not only to have markets but also areas of planning within organizations of the appropriate size.  What this mix should be we find as a result of competition.

DBx: One of the great errors of mid-20th-century economics was to assume that the best structure of almost every industry was one of many firms, with all of these many firms producing very similar outputs.  This assumption rested, in turn, on two other assumptions: (1) that only price competition is beneficial to consumers (or that lower prices are always a greater benefit to consumers than are any other results of competition), and (2) that an industry consisting of many firms each producing very similar outputs invariably maximizes price competition.

In fact, consumers benefit not only from price competition, but from market competition generally – importantly, from competition that improves product quality or that increases the variety of products available.  In real-world markets, entrepreneurs and businesses must be left free to experiment with different firm organizations and different industry organizations in order to discover not only the ‘optimal’ mix of price competition with non-price competition, but also to discover the ‘optimal’ firm and industrial organizations for best ensuring these kinds of competition.

Optimal forms and mixes of competition, and optimal firm and industrial organizations, can no more be determined a priori than can optimal market prices.