Kevin Brancato has a beautiful post in response to Tyler Cowen’s musings about gas price and full service regulations. Kevin puts it clearly, in a way I wish I had said myself:
Let me state my views bluntly: perfect competition is a myth! I would be shocked to find any markets that function like some ridiculously simplistic model. First, no market meets the almost impossible criteria of zero transactions cost, perfect & symmetrical information, homogenous product, non-decreasing marginal cost, zero fixed cost, and indefinite numbers of suppliers and demanders. Competition in the real world is a battle between real producers as they vary prices, quality, service, and the total experience.
Kevin also makes an absolutely crucial point, one that many of our model-happy theorist colleagues either find unimportant or choose to willfully misunderstand:
Since perfect competition is a myth, the criticisms of welfare economics, which holds the results of perfect competition as an ideal, should be taken not with a grain of salt, but with a sea of salt. How do you determine whether a segment of the economy is a chronic “market failure” when you’re not sure what an efficient market looks like, or whether any of the alternatives to markets proposed by analysts, pundits, and politicians provide more “socially efficient” results?
Kevin also offers lots of links to data to support his argument. Excellent post. See also Gary Leff’s illuminating comments on the matter.