The notion of perfect competition only exists in textbooks of economic theory

Big is beautiful Bibek Debroy Indian Express: Thursday, June 22, 2006 The writer is secretary-general, PHDCCIbdebroy@phdccimail.com

Most people have a notion of perfect competition with hundreds of producers floating around, all selling undifferentiated products (or services). That notion of perfect competition only exists in textbooks of economic theory. Even in the agricultural sector, what with branding and product differentiation, perfect competition is fast disappearing.

Twenty years ago, how many people thought salt or atta would be branded? The world is fast moving towards two or three in every segment (cold drinks, aircraft manufacturers, operating systems, browsers, currencies, any particular newspaper or magazine segment), with additional ones thrown in as no more than flavour. Yet, in sector after sector, we have this fascination for the small and an abhorrence of the large, support for David rather than Goliath. 33 years ago, E.F. Schumacher wrote a book titled Small is Beautiful and it was a rage.

Fashions come and go, but beauty has nothing to do with business. Large means exploitation of economies of scale and scope and that reduces costs of production. If those lower costs are passed on to consumers, what is wrong with being large? Large makes it easier to enforce regulatory standards, even bring consumer pressure. If thousands of buses, taxis, trucks and auto-rickshaws in Delhi are instead run by three or four large fleet operators, what will be terribly wrong?

As a counterpoint to that notion of perfect competition, we have yet another figment of the imagination, a single producer or monopoly. The world of monopolies is also fast disappearing, thanks to changes in technology and possibilities of unbundling. Rarely, not even in the broad infrastructure sector, will one find examples of what used to be called natural monopolies, situations where technical reasons warrant a single producer. For everything in the world, there are now substitutes, except in instances of unnatural monopolies.

Unnatural monopolies are situations where government licensing restrictions lead to monopolies. It seems very difficult to give up the legacies of the Hazari Committee (1955), the Mahalanobis Committee (1964) and the Dutt Committee (1965), all contributing to the Monopolies and Restrictive Trade Practices (MRTP) Act (1969)... However, mindsets are difficult to change and therein lies the problem. Many people are still in love with the MRTP Act and the MRTP Commission.