Effects of competition on profit margins from a Post Keynesian perspective

International audienceThe interdependence of competition and profit margins is one of the mostimportant features of industrial economics. According to mainstream economics,intense market competition results in smaller profit margins. Long-termprofitsare contingent on competition and market imperfections; perfect competitionpresumably reduces profits to zero in the long run (excluding normal profitsallocated to managerial compensation).This relationship between competition and profit margins is also an importanttheme in Post Keynesian economics. From Joan Robinson’s Economics of ImperfectCompetition to Kalecki’s analyses of the degree of monopoly, Post Keynesianeconomists have long been interested in this aspect of economic theory. There ishowever no unified Post Keynesian view of competition and its effect on profitmargins, and we can, from a historical perspective, identify two main strands ofPost Keynesian thought, each relying on a specific theory to determine profitmargins. Based on the ‘imperfect competition and degree of monopoly principle,’the first branch considers that profit margins are the result of market structure(market imperfections). In this view, as in the theory of monopoly capitalism (seeMoudud, Bina, and Mason 2013), profit margins thus positively correlate withcompetition imperfections and degree of monopoly. Rooted in the ‘investmentfinancing tradition,’ including the works of Alfred Eichner and Adrian Wood, thesecond branch makes a direct connection between profit margins and internalfinancing requirements for investment. We consider this second view to clearlyrepresent Fred Lee’s economic thinking (see, for example, Lee 2013b). A comparisonof the two Post Keynesian branches shows that the first position closelyresembles what later became the mainstream view on the relation between competitionand profit margins (notably with the emergence of the so-calledstructure-conduct-paradigm in the 1960s and 1970s, which remains an influential theoreticalframework for industry-competitionpolicies). Stated succinctly, in this theory, thetougher the competition, the smaller the profit margins.Nevertheless, empirical testing of this theory poses certain difficulties. In fact,many empirical studies fail to validate the direct link between the degree of competition(regardless of the chosen criterion) and profit margins. Such studies often report weak or even paradoxical results, be it at the sectoral or macroeconomiclevel. These unexpected results can, however, be explained from the‘investment-financing’theory of profit margins. Based on the theories of AlfredEichner (1973, 1976) and Adrian Wood (1975), this second branch offers anexplanation for why profit margins are independent of the degree of competitionin the market. In conjunction with his two-curvediagram, Adrian Wood’s analysis(developed in his 1975 book, A Theory of Profits) enables us to show whycompetition does not affect the determination of profit margins. Therefore, thesecond strand’s main contribution is its emphasis on the fundamental role ofinternal financing in capitalist economies, which is the missing link in industrialeconomics