In our chapter on Competition and the Invisible Hand, we quoted the Austrian economist Joseph Schumpeter who said that in the textbooks the most important fact about competition was that price was pushed down to marginal cost. However, Schumpeter goes on to say:

.....in capitalist reality as distinguished from its textbook picture, it is not this competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization…competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition is more effective than the other as a bombardment is in comparison with forcing a door, and so much more important that it becomes a matter of comparative indifference whether competition in the ordinary sense functions more or less promptly.

a. Relate Schumpeter’s statement to the models of monopoly and oligopoly discussed in this and earlier chapters. In what ways are these market forms inefficient? In what ways might they be efficient or beneficial?

b. The terms static efficiency and dynamic efficiency are sometimes used in economics. Is there a trade-off between the two types of efficiency? How might we evaluate this tradeoff?