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 appliquéd 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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Keeping it Real

What is the best way to persuade somebody to give something away? Obviously it helps if you believe that it is worthless or, better still, that it does not exist at all. The issues of what is or is not, what exists or does not exist, what does or does not value clearly have great economic significance. The long struggle between capital and labour over the value of production no longer takes place in the world of the real. Yet those prophets of the illusory and the delusional—the French postmodernists philosophers—have not seen their iconoclastic insights gain much purchase within the discipline of economics. Perhaps because they were gaining much more practical significance in the economy itself.

Three examples of the extraction of value follow. In each case a theoretical situation is developed to create a virtual entity, developed as the doppelganger of a real economic thing. The virtual entity is then expanded into a hyperreal entity, supported by a mythological system, into which the value of the thing is poured, leaving the thing itself as an apparent husk. The hyperreal is now bought and sold and its value determined by a mythological marketplace. The real good is seen almost as a by-product.

Let us take as our first example a cup of Starbucks coffee. Naomi Klein used this as a prototypical example of the selling of a brand rather than a product. The price of the coffee, the energy made to produce it and the wages paid to the Starbucks employees are a fraction of the price you are asked to pay for it. What you are paying for the is the privilege of being a person who can self-identify as a drinker of Starbucks coffee. You are paying your membership fee to a club. The value that club is created and maintained by Starbucks when they advertise their brand and associate it with other things you like, such as music stars or flash cars or sexy young people.

For a second, and more practical example I turn to Tower Colliery in the South Wales Valleys. I have argued long and hard with academic colleagues about whether the Colliery is important as more than a myth. My argument always proceeds along the lines that, mythology and markets apart, in a cold winter the anthracite will warm your hands whereas the myth can only ever warm the cockles of your heart. However, I recently saw for sale in my local farmers market coal from the Forest of Dean, washed and packaged in a lovely bag, and with a whole history of the industry in the Forest and the rights of local people to extract the coal as Freeminers, a right extending back to the middle ages. I am waiting to see whether this audacious piece of brand creation is successful.

More amorphously we can see the same process at work in the investment of money in stocks and shares or on-line gambling. Punters have here lost track of what they really value. The thrill of the chase, of the unpredictable outcome, has replaced the original incentive of real material gains. Owners of homes are prey to similar delusions when they seek comfort from news of the increasing ‘value’ of their home, which continues to offer them the same four walls and the same degree of material comfort. The supportive mythology suggests that there is some relationship between real world events and stock-market values. But the influence of the coldness of the winter on the oil price or the rate of consumer spending on the value of M&S stock has dwindled as the power of ideas has increased. Rational expectations have generated self-fulfilling prophecies and delusional dreams in a market where belief itself is the primary value.

These are all example of what Ben Fine has called, in another context, ‘making capital out of the ephemeral’. In each case the hyperreal is supported by a system of mythologizing, as so wittily pointed out by Baudrillard and Barthes. In the late form of capitalism, dominated by the 'creative industries', the extraction of surplus value has been developed in new and creative ways. Now it is meaning itself that is extracted, leaving only the sign of that meaning. The intellectual minimization of the use value and its substitution with a hyperreal value whose material worth can be extracted by the creator and owner of the hyperreal, invariably a global corporation such as Honda, which sells its brand under the rubric ‘The Power of Dreams’.

The philosophy of the postmodernists has been commodified and revalued to be used to generate economic value in the hyperreal they pilloried, and thus provides another trick to enable the unfair distribution of resources. However, the movement of capitalism’s age-old game of value extraction into the realm of the hyperreal is excellent news for those of us who seek to live alongside rather than within this economic nightmare. If we can wear the badge of lowly status endowed by the proletarian shopping brands with pride we can buy better quality real usable goods for absurdly cheap prices, thereby reducing our need to work. We need also to create our own real currencies to exchange between ourselves.

Although our intuitions and needs have been distorted by the advertising myth-makers it is not that difficult to extract yourself and to decide what you really want. No wonder keeping it real has become the mantra of our age. Tweet