6 May 2007

The Assumptions of Perfect Competition: Lesson 4

Assumption 4: All firms produce an identical product

This assumption is necessary to achieve the required situation where we make our purchases solely on the basis of price; it is often referred to as the homogeneity of the product, while consumers are defined as being indifferent between the different products on offer. We are indifferent between the products of different suppliers, since we ‘regard all units of the industry’s product as identical’. For this to be true, we would have to be sure that our teenage children would be equally happy with a Primark tracksuit for Christmas as one emblazoned with the latest trendy sports brand. Or that a pair of trainers with Wayne Rooney’s face appliqu├ęd to the side would offer no more delight than another pair without this childish respository of England’s hopes.

One textbook deals with this point about consumers’ lack of indifference by explaining that this assumption is unlikely to be met in practice, citing the example of the car industry where, even if there were many firms, perfect competition would not be possible because the Ford Mondeo and the Vauxhall Vectra cannot be considered homogeneous goods; consumers have individual preferences for one or the other. The assumption can then slightly qualified so that, if a producer decides to produce a slightly different product then this does not invalidate the assumption, but rather a new market is created. This may hold water if we think of the market for shoes being divided into the market for shoes and the market for trainers. But we can hardly make sense of a theory that would require a different market for trainers with each different sportstar’s face, or for each different team’s football shirt. Yet it is clear that young people are far from indifferent between these goods.

Again the proof of the irrelevance of this assumption is found in the actions of the market actors themselves. If indifference between similar items were part of their understanding of the market, why would the expend so much energy shoring up the uniqueness of their brand, which is the main focus of energy of the global corporations, as shown by Naomi Klein. The purpose of the brand is directly to undermine the homogeneity of products, to achieve a situation where indistinguishable brown liquids become of hugely different value because they are marked with the label ‘Somerfield Cola’ or ‘Virgin Cola’. The advertising industry is explicitly dedicated to undermining this assumption by establishing consumer preference for one brand or another.

The brand is now the key means for corporations to establish value. It is a means of inflating the value of a product to the customer compared with the actual value of the item in terms of what it can do. In Marxist terminology, the exchange value is extended way beyond the use value of the product. This means a bonanza for the corporation, which has to only pay the poverty wages to make the items but can extract a profit equal to almost all the value on the market. But if you are stupid enough to buy a worthless brand rather than a useful product I suppose you have only yourself to blame!

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