The Perfectly Competitive Production of Collective Goods: Comment
Thompson's model preserves the existence of many firms producing the collective good by having all firms act under the Cournot-Bertrand convention and by discriminating in price among consumers. This use of the Cournot assumption is clearly at variance with the prior assumption by Thompson that there is perfect knowledge of all market-relevant information . peculiar results of the Thompson model rely on perfect knowledge by producers of consumers' preferences, and upon perfect knowledge by consumers of the intentions of producers to discriminate in price. But perfect knowledge of all market-relevant information evidently excludes knowledge of the fact, by any producer, that he can have all the revenue of the industry at no additional cost simply by reducing his price (s) slightly. This is simply not compatible with perfect competition as usually understood, and has nothing to do with whether or not consumers have an incentive to compete against each other. A new entrant or an existing firm in Thompson's model who accidentally reduces his price will reap great rewards. This could not happen in a perfectly competitive equilibrium. If any firm in Thompson's model reduces its price, a destructive competitive price reduction spiral will ensue, reducing the price to equality with marginal cost, which is zero. This is what perfect competition is all about, and it is very different from the behavior of Thompson's producers, who do not, in fact, compete. Just as the nongovernment allocation of a good requires barriers to competition, price discrimination requires the same. There is nothing in the inherent nature of a good which provides these barriers. As a result, Thompson has to make special assumptions about the nature of competition to get his result. These assumptions are not consistent with perfect competition. I would have no quarrel with Thompson if he had titled his paper The Production of Collective Goods Under a Very Peculiar Kind of Non-Competitive Polipoly, and had deleted all further references to perfect competition. One might still argue, of course, that the model is then void of either practical or theoretical usefulness. On the practical side, I submit that each of the examples cited by Thompson of the (e.g., nongovernment) allocation of a good is a case in which there is either some barrier to competition, or in which some good has been substituted for the collective good. In broadcasting, for example, stations substitute the private good, audience size, for the public good, programming. They sell the good, not the one. No collective good can be privately and competitively produced. Nongovernmental allocation of such a good requires both exclusion devices and barriers to competition. Efficient allocation may require price discrimination.