Excessive Competition: Theory And Policy Options

Most of enterprises in excessive competition industry will drown in red ink and strive to exit from the industry in theory. But in our country, new firms always search for entering into the so-called excessive competition industry. Furthermore most firms can obtain the comparatively high profit in some of excessive competition industries, for example, the automobile industry. There are only two kinds of the contradiction between reality and theory: The previous theory of excessive competition cannot explain the reality, or excessive competition doesn't happen from the reality. Lacking of scientific theory of excessive competition leads to the beginning fault to the actual judgment of excessive competition ; it is not easy for us to get accurate data due to the dynamic characteristics of demand, cost and technology; And ignorance to universal existence of transaction cost covers the essence of problem and makes us missing the key factor of empirical analysis. The relation of demand elasticity and total revenue is the new standard of judging excessive competition and defers various discounts, moreover, demand elasticity based on Producer's Price Index is easy to get. Not all discounts means excessive competition, and there are natural distinction between "price behavior" and "excessive competition". Competition and existing pressure force firms try to various organization structures and methods of resource distribution as much as possible, competition innovation and spirit of enterprise unceasingly destroy former market equilibrium. There is most price behavior in our country these days, but it is indeed a low level competition that the number of firm is large, scale of firm is small and depreciating price is the main way of competition. Division of labor transaction cost and extent of the market are clues of analyzing many problems, and transaction cost is the vitals of their three relation, the transaction cost caused by institutional barriers is the basic reason of our many industry lying in low efficiency competition. The operating mechanisms of state-owned enterprise and local protectionism are the main institutional barriers, they make different firms in unequal competition, andinduce excessive firm entry, at the same time cause low efficiency and failing firms unable to exit; restrict resource and labor to transfer, so increase the transaction cost of entire society. So the national economy falls into low level, degree of division of labor is not high, and extend of market is narrow, specialized production cannot function, cost of unit product is comparatively high, the homogeneity of products increases. Accordingly, the phenomenon of small scale of firm low concentration of industry and many of competitors appear. One theoretical basis of traditional excessive competition is overcapacity, but from the angle of strategy and future development of firm, investment in advance is reasonable choice when expecting revenue are positive; considering of cooperating of different production crafts, actual capacity is not one in full-load running rate. Facing such condition, what government should do is not restraining firm's pricing and entering into some industry with freedom, but should put down exit barriers and help low efficiency or failing firm to exist, basically, is to reform the foundation of institutional barriers— — division system of financial administration authority and mechanisms of state-owned enterprise, perfect law and supervision system, simultaneously, constrain opportunism, return to market.