Competition

Adam smith’s notion of an invisible hand as the guiding mechanism of an economy is essential to the economist’s idea of a competitive market. The formal model of competition abstracts from many aspect of real-world competition to highlight the essential elements of resource allocation under competition. The pattern of resource allocation under competition is optimal in a way that we will explain subsequently. In this sense, competition is a Shang-La up to which no real-world market can measure. Perhaps the most interesting parts of industrial economic involve modeling more realistic markets and comparing the result with those of the competitive model. Much antitrust policy involves the development of rules for real-world rivalry that, it is hoped, will move markets toward the competitive ideal. If follows that to address economic and policy questions, we need to understand the basic competitive model.