explores the consequences of market niches for economic efficiency, growth and ... of monopolistically competitive markets as developed by Chamberlin (1933) ...
Market Niches, Competition and Economic Performance: More Clues from Ecology? Chapter 8 in Clement A Tisdell (2013) Competition, Diversity and Economic Performance: Processes, Complexities and Ecological Similarities, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing Limited 8.1
Introduction
This chapter examines the relationship between market niches and economic competition and explores the consequences of market niches for economic efficiency, growth and diversity of commodities. Concepts of a niche in everyday use, ecology, economics and business management are compared. Factors giving rise to market niches, some of which are institutional, are identified, and their links with barriers to entry and mobility are discussed. Common negative views about their consequences for com- petition and economic efficiency are outlined. However, the availability of market niches can potentially have a very positive impact on economic growth and development as well as on the diversity of commodities. New measures of global diversity of commodities are introduced. It is suggested that economic globalization involves institutional change that reduces the availability of niches and threatens long-term economic growth and diversity of commodities. Niches also provide frictions in economic systems and may have stabilizing properties. Concepts of niches in relation to market competition and development are used more in the business management literature than in the economic literature. However, niche concepts are basic to much ecology and are widely applied to the analysis of competition between species (interspecific competition) and less frequently to intraspecific competition (Begon and Mortimer, 1986). Niche concepts are mainly applied in economics to market competition and the development of markets. In contrast to ecology, they are most widely applied in economics to competition between firms and businesses in the same industry, but sometimes they are also applied to competition between some industries or segments of industries. Ecologists give greater attention to the availability of niches and their exploitation as a factor in biological evolution and biodiversity (see, for example, Christiansen and Fenchel, 1977) compared with the attention given by economists and specialists in business management to the role of market niches in economic growth, and in the development and the variety of available commodities. However, the creation of market niches via product differentiation is considered by von Mises as one of the most important means of competition, and thereby, of economic development (von Mises, 1961). This view is also apparent in the works of 1
Schumpeter (1954). Nevertheless, while product differentiation can be important in the competitive market process in creating market niches that give economic power and above-normal profit to their incumbents, they are not sufficient for these latter purposes. This is evident from the theory of monopolistically competitive markets as developed by Chamberlin (1933) and Robinson (1933). In such markets, all firms in equilibrium produce slightly differentiated products and only make normal profits because there are no significant barriers to entry. These types of monopolistically competitive firms are unlikely to be a powerful force for economic development given Schumpeter's point of view (Schumpeter, 1954, Ch. 8). The economic incentive to innovate depends on there being some impediments to rapid use of innovation by entities other than the innovator and the opportunity to earn above-normal profit (see Chapters 3 and 5 in this book). Although Chamberlin (1933) does not specifically mention market niches in his theory of monopolistic competition, nor, unlike Schumpeter (1954), does he consider the dynamic consequences of monopoly, his theory shows strong similarities with a niche-based approach. For example, intra-industry competition occurs but is moderated in the large group monopolistic competition case by businesses occupying market niches. As Chamberlin (1933, p. 81) says, 'each producer within the group is a monopolist, yet his market is interwoven with those of his competitors, and he is no longer isolated from them'. While Chamberlin (1933) develops his theory of market equilibrium for competitive large groups of firms by assuming uniformity between firms and the type of sub-markets they occupy, he is at pains to point out that this is only for expositional convenience and that heterogeneity is the rule (Chamberlin, 1933, pp. 81-2). He emphasizes that, in practice, the following is more usual: if high average profits lead new competitors to invade a general field, the markets of different established producers cannot be wrested from them with equal facility. Some will be forced to yield ground, but not by enough to reduce their profits below the minimum necessary to keep them in business. Others may be cut to the minimum, and still others may be forced to drop out because only a small demand exists or can be created for their particular variety of product. Others, protected by a strong prejudice in favour of theirs, may be virtually unaffected by an invasion of the general field- their monopoly profits are beyond the reach of competition (Chamberlin, 1933, p. 82).
These differences in business prospects can be attributed to differences in the nature of the market niches occupied by different businesses. Consequently, Chamberlin envisages a type of contest competition (discussed in the previous chapter) in monopolistic competition. This diversity acts as a stabilizer and helps to ensure the sustainability of the industry, a subject given particular consideration in Chapter 10 of this book. However, Chamberlin (1933) fails to link business heterogeneity (and the fact that some firms can earn persistently abovenormal profit) to the rate of technical progress and industrial evolution. Several writers consider such a connection to be of considerable importance (Laland and Odling-Smee, 2000; Lewontin, 2000; Schumpeter, 1954; Tisdell, 1999). In other words, the fact that the industrial playing field is not level may be a positive influence on technological progress and the 2
dynamics of generating product variety. Observe that Chamberlin's analysis of monopolistic competition can provide an explanation of why global variety of products may fall and local variety of products may increase initially as globalization proceeds. Globalization is associated with falling transport and communication costs as well as reduced man-made barriers to trade. These result in greater economies of scale being available to firms producing or marketing a particular variety of a product (or combinations of varieties of products) and possibly increase product substitutability. As pointed out by Beath and Katsoulakos (1991, p. 8), both these factors reduce product variety, given Chamberlin's microeconomic analysis. In retailing, for example, retailers with similar outlets in different locations (chains of stores) may be favoured, and so may be those involved in franchising products involving a uniform product or uniform combination of varieties of products, for example, some 'fast-food' outlets are able to spread their central overhead costs between many localities. Consequently, local varieties of products may be lost and replaced by those of business chains or franchising entities. Thus, even the static theory of monopolistic competition is able to explain why economic globalization may be associated with declining global product variety. Therefore, Chamberlin's theory can also be used to support the thesis developed here that economic globalization (eventually) reduces global diversity. This subject is discussed further in Chapter 11. This chapter first discusses concepts or the niche in everyday use, in ecology, in economics and business management; and throughout it, ecological theories involving niches are mentioned because niche concepts have wide application in ecological analysis. This chapter is further developed by investigating the ways in which economic niches arise and the relationship of market niches to market competition and economic efficiency. Then the consequences of niches for long-term economic growth and the diversity of commodities are considered. The relationship of the discussion with economic globalization and the extension of markets is subsequently explored.
Table of Contents of Chapter 8 8. Market Niches, Competition and Economic Performance: More Clues from Ecology?
160
8.1.
Introduction
160
8.2.
Concepts of the Niche in Everyday Use, In Ecology, In Economics and Business Management
163
Origins of Market Niches and their Relationships to Competition and Economic Efficiency
166
Consequences of Market Niches for Long-term Economic Growth and Development
170
Economic Niches and Diversity of Commodities
174
8.3. 8.4. 8.5.
3
8.6.
Relevance of This Analysis to the Economic Globalization Debate
176
8.7.
Concluding comments
179
Notes
179
References
180
List of Figures and Tables in Chapter 8 Figure 8.1 Figure 8.2
Trade-off between allocative economic efficiency and economic growth associated with niches
173
Some possible theoretical relationships between diversity of available commodities, the extent of market competition and the availability of market niches
176
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