Emil Lederer, On Imperfect Competition (1935)

Emil Lederer’s review essay examines Edward Chamberlin’s The Theory of Monopolistic Competition as a fundamental challenge to orthodox price theory. Its movement is both reconstructive and critical: Lederer first explains differentiated markets, decreasing production costs, and selling costs, then develops seven numbered reflections on entrepreneurial behavior, equilibrium, economic efficiency, and distribution. He accepts the importance of Chamberlin’s departure from perfect competition while questioning whether its assumptions establish a stable equilibrium with restricted output. The central issue is whether imperfect competition explains persistent unused capacity, or whether uncertainty, entry, and competitive retaliation continually unsettle the proposed outcome.

Chamberlin replaces the homogeneous market with partial markets organized around differentiated products, local advantages, and distinct groups of buyers. An individual producer consequently faces a downward-sloping demand curve rather than a price fixed independently of its own output. Lederer couples this change with decreasing average production costs: expanding output within an existing plant spreads fixed costs without necessarily raising unit operating costs. He presses the point beyond Chamberlin’s account. Building new capacity produces a discontinuous change in conditions, not proof of a general law of increasing costs; rising input prices or falling profits likewise need not establish diminishing returns.

Entry initially reduces exceptional profits, but Chamberlin’s equilibrium arrives when producers obtain only “normal” profit, treated as a cost. With differentiated demand, that point can occur before capacity is fully utilized and at a higher price than under perfect competition. Lederer identifies the unresolved behavioral premise:

It is difficult to understand how a further expansion of production can be avoided, unless a real monopoly, i.e. an organization of the producers, has been built up.

The distinction is between a geometrically possible equilibrium and conduct that would sustain it. A producer may expand despite declining profitability rather than surrender customers to competitors. Normal profit is itself uncertain, especially as expectations change over time. Even under ostensibly free competition, treating a fixed profit requirement as a cost could generate unused capacity; conversely, a producer facing differentiated demand might behave as a price-taker and expand output until weaker firms disappear. Neither market classification alone determines the outcome.

Selling costs constitute the second major innovation. Production expenditure increases supply, whereas selling expenditure seeks to increase demand without increasing supply. Advertising can therefore enlarge an enterprise’s sales at an unchanged price by taking customers from competitors or diverting purchasing power from other goods. Combined production and selling costs may rise even while production costs continue to fall. Lederer summarizes the potentially far-reaching result:

Or, the combined efficiency will be less, economically considered, and unemployment will be greater and permanent, because equilibrium governs.

This is the implication of the reconstructed model, not an unqualified endorsement of its equilibrium. Its significance lies in making unemployment and inefficient capacity use compatible with equilibrium rather than treating them solely as temporary disturbances. Such conditions can arise spontaneously from capitalist production, especially large-scale industry, branded goods, and location-dependent selling, without tariff protection.

Lederer’s objections then turn to strategic uncertainty. Producers must anticipate whether rivals will maintain their output or retaliate; the demand curve does not settle that question. A seemingly profitable restriction of production may provoke expansion elsewhere and defeat the intended price increase.

Since these reactions will not depend upon the situation but upon the decision of the individual persons, it is impossible to say for certain what will happen.

Theory can specify possible outcomes without selecting a uniquely necessary one. Lederer’s clearest case of partial monopoly is a dominant enterprise whose output determines price alongside smaller competitive enterprises. More generally, even an established equilibrium remains vulnerable to outsiders. Advertising, brand suggestion, and temporary price cuts enable entry into already supplied markets and can establish a lower normal profit rate. Equilibrium therefore depends on assumptions about knowledge, reactions, and entry that cannot simply be read from cost and demand curves.

The review then widens from the individual market to the national economy. Increased selling expenditure may shift demand toward one product only by reducing demand elsewhere. Private sales growth is consequently not equivalent to an enlarged social product. Lederer allows that particular circumstances may increase total production, but stresses the danger when aggregate purchasing power does not grow:

Or, in such cases the actual consumption will be progressively less than the consumption which would be possible on the basis of the amount of productive factors expended and the technical standard attained.

This distinction between private economic value and social value gives the argument relevance to economic planning. Resources devoted to securing demand may redistribute expenditure while lowering the consumption obtainable from existing productive capabilities.

Lederer closes with implications for economic theory. Demand curves and enterprise cost structures can explain prices while leaving value theory largely in the background, although marginal utility still underlies demand. More radically, increasing returns undermine marginal-productivity explanations of distribution:

If a producer is working under the law of increasing returns, the compensation of the individual factors of production, labor, land and capital, can never correspond to their marginal productivity, even if one were able to impute this to them exactly.

He argues that factor payments must instead relate to average productivity, which marginal adjustments cannot establish. Where increasing returns prevail throughout industry, as during depressions, distribution requires another principle. The essay’s lasting conceptual move is thus to connect differentiated markets with problems extending beyond price formation: strategic instability, socially wasteful selling expenditure, unemployment, and the limits of marginalist distribution theory.