Why I love Imperfect Competition

In a recent statement, Donald Trump asserted that Americans are overly affluent and proposed that his tariffs would remedy this issue:

Someone remarked, ‘Oh, the shelves are going to be stocked.’ Well, perhaps children will settle for two dolls instead of 30. And maybe those two dolls will come with a price tag a few dollars higher than usual.

This scarcity-oriented philosophy appears to be gaining traction among Republicans, mirroring Bernie Sanders’s earlier observation that Americans possess an excess of deodorant and shoes.

This mindset holds a peculiar economic rationale. It hearkens back to Oskar Lange’s arguments for socialism, which posited that competition aims to identify the most cost-effective way to produce goods or services. Once this method is established, the goods can be produced and sold at that cost, leading to an ideal state of perfect competition. In such a scenario, you would find only one version of a product in the market; every item would be indistinguishable from the next. Thus, both socialism and Trumpism aspire to eliminate wasteful competition by simply mandating the most efficient production methods.

Perfect competition is often deemed the “ideal” market structure due to its cost-minimizing attributes, where price aligns with marginal cost at the lowest point on the average total cost curve. (It’s worth noting that the argument from both Sanders and Trump doesn’t strictly advocate for perfect competition—after all, in that model, more of a good is produced. They often claim, as Trump did, that there is both too much of a good and too much variety.)

However, despite perfect competition being an ‘ideal type,’ I contend it represents an undesirable outcome. Why impose a one-size-fits-all solution? People have diverse tastes and preferences. Some enjoy pepperoni on their pizza while others prefer anchovies. Some find joy in opera, others in heavy metal. Sometimes you crave a feel-good TV show, and other times, you want something that challenges you. Variety, as the saying goes, is the spice of life. Yet, in economic terms, this variety constitutes imperfect competition. Product differentiation leads to “monopolistic competition,” which means firms earn no economic profit, yet average total costs are not optimized. While some categorize imperfect competition as a “market failure” or “inefficient market,” in reality, it reflects a more efficient market: one that caters to people’s varied tastes.

I find imperfect competition quite appealing. It permits individuals to express their unique preferences. This is anathema to central planners (think Trump, Sanders, and Navarro). Market liberalism celebrates the imperfect and champions the market rather than making arbitrary choices about what people ought to desire.