Fritz Machlup, [Contribution to Price and Production Policies of Large-Scale Enterprise] (1939)

Machlup’s round-table contribution examines the practical significance of monopolistic competition theory for economic analysis and public investigation. He begins by distinguishing its usefulness to pure theorists, economic analysts, government officials, and businessmen, then sets aside the first and last perspectives. The contribution moves from a delimitation of the theory’s subject matter to the problem of uncertain reactions among rival firms, before proposing a research strategy combining empirical and theoretical case studies. Its central claim is that uncertainty limits what the theory can establish but does not diminish the need to investigate the expectations shaping business decisions.

Machlup distinguishes the theory’s recent innovations from the longstanding recognition of market situations between pure competition and monopoly:

What is new is the emphasis on product differentiation and the recognition of the surprising frequency of oligopoly.

This distinction narrows his inquiry. He doubts whether product differentiation without a small number of sellers requires the more complicated assumptions of monopolistic competition theory for fruitful analysis; he also suspects that such situations are uncommon. He therefore concentrates on entrepreneurial behavior where differentiation and fewness of sellers coexist. These are stated as doubts and suspicions, not demonstrated findings. The resulting scope directs attention away from differentiation alone toward the interaction of firms whose decisions depend on anticipated responses from identifiable rivals.

That dependence creates the principal analytical difficulty:

Estimates of rivals' probable reactions to given price and output decisions are an inescapable incident of oligopoly, and as these are necessarily vague and conjectural, so to a degree must be any conclusions reached by an inquiry into the forces determining entrepreneurial behavior in these circumstances.

Conjectures are not incidental imperfections that an analyst can safely discard. They help determine firms’ actions and become data of the general equilibrium system. Yet they remain largely unknown and may be incompatible with any equilibrium. Machlup thus identifies a tension between theoretical tractability and fidelity to the decisions being explained. Assuming the difficulty away risks removing a constitutive feature of oligopoly; preserving every complication risks making theoretical reasoning unmanageable. His proposed task is to construct simplifying assumptions that retain a measurable approach to realism, while studying both sellers’ conjectures and the ascertainable objective conditions that shape them.

The contribution offers a methodological direction rather than a finished model:

Evidence of the feasibility of this procedure may be sought by two methods: empirical case studies and theoretical case studies. My own experience leads me to the conclusion that both of these methods offer promise of fruitful results, the more so if their interdependence is recognized and they are used in close conjunction.

Theoretical and empirical inquiry should therefore proceed together, testing whether manageable assumptions can illuminate particular firms and industries. Machlup closes by addressing practitioners of political economy: monopolistic competition theory can guide the directions, methods, and objectives of investigations into the modern economic system. Its relevance lies partly in warning researchers what cannot responsibly be assumed or concluded. Even negative precepts remain useful when they prevent an apparently determinate explanation from obscuring the uncertain expectations on which market behavior depends.