Pier-paolo-saviotti Towards a Generalised Definition of Competitiveness f Important Evolutia...

8/11/2019 Pier-paolo-saviotti Towards a Generalised Definition of Competitiveness f Important Evolutia Concurentei

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Paper to be presented at the DRUID Summer Conference 2004 on

INDUSTRIAL DYNAMICS, INNOVATION AND DEVELOPMENT Elsinore, Denmark, June 14-16, 2004

TOWARDS A GENERALISED DEFINITION OF COMPETITION

PIER PAOLO SAVIOTTI (*) and JACKIE KRAFFT ()

(*)INRA-SERD, Universit Pierre Mends-France, BP 47, 38040 Grenoble, Cedex 9, France.

Tel: (33-4) 76.82.58.31; Fax: (33-4) 76.82.54.55; E-mail: saviotti@grenoble.inra.fr;and IDEFI, CNRS UNSA, 250 rue Albert Einstein, 06560 Valbonne, France.() IDEFI, CNRS UNSA, 250 rue Albert Einstein, 06560 Valbonne, France.

Tel: (33-4) 93 95 41 70 ; Fax : (33-4) 93 65 37 98 ; E-mail: Jackie.Krafft@idefi.cnrs.fr

AbstractIn this paper we propose a conceptual model of competition which is in line with recentdevelopments in the economics literature. We concentrate mostly on two shortcomingsidentified in the past literature, namely on the process critique and on the effect of qualitativechange, that we consider the heir to the product differentiation critique. Furthermore, we

consider that these two shortcomings are not independent, but closely related. For example,qualitative change destabilizes the system, thus inducing a dynamics of change by which itsown subsequent development is affected.

The conceptual model of competition that we develop in this paper is based on a particularrepresentation of product technology and of industrial sectors, in terms of productcharacteristics. By means of this representation we propose a definition of the intensity ofcompetition that is in principle applicable empirically and useful for modelling purposes.Furthermore, we distinguish intra-sector competition from inter-sector competition, wemaintain that these two types of competition interact and that both influence economicdevelopment. A part of our paper is based on the results of a model of economic development

by the creation of new sectors. Finally, our model of competition allows us to discuss therelationship between competition and growth.

We start our paper by means of a brief summary of the literature on competition and continue by presenting our conceptual model of competition, its analytical dimension and theimplications it has for economic growth and development.


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DRUID 2004/Draft 1/PPS/ 1

TOWARDS A GENERALISED DEFINITION OF COMPETITION

AUTHORS: PIER PAOLO SAVIOTTI (*) and JACKIE KRAFFT ()

AFFILIATION :

(*)INRA-SERD, Universit Pierre Mends-France, BP 47, 38040 Grenoble, Cedex 9, France.Tel: (33-4) 76.82.58.31; Fax: (33-4) 76.82.54.55; E-mail: saviotti@grenoble.inra.fr;and IDEFI, CNRS UNSA, 250 rue Albert Einstein, 06560 Valbonne, France.

() IDEFI, CNRS UNSA, 250 rue Albert Einstein, 06560 Valbonne, France.Tel: (33-4) 93 95 41 70 ; Fax : (33-4) 93 65 37 98 ; E-mail: Jackie.Krafft@idefi.cnrs.fr

1) INTRODUCTION

In this paper we propose a conceptual model of competition which is in line with recentdevelopments in the economics literature. We concentrate mostly on two shortcomingsidentified in the past literature, namely on the process critique and on the effect of qualitativechange, that we consider the heir to the product differentiation critique. Furthermore, weconsider that these two shortcomings are not independent, but closely related. For example,qualitative change destabilizes the system, thus inducing a dynamics of change by which itsown subsequent development is affected.

The conceptual model of competition that we develop in this paper is based on a particularrepresentation of product technology and of industrial sectors, in terms of productcharacteristics. By means of this representation we propose a definition of the intensity ofcompetition that is in principle applicable empirically and useful for modelling purposes.Furthermore, we distinguish intra-sector competition from inter-sector competition, wemaintain that these two types of competition interact and that both influence economicdevelopment. A part of our paper is based on the results of a model of economic development

by the creation of new sectors. Finally, our model of competition allows us to discuss therelationship between competition and growth.

We start our paper by means of a brief summary of the literature on competition and continue by presenting our conceptual model of competition, its analytical dimension and theimplications it has for economic growth and development.

2. COMPETITION IN RETROSPECT.

The evolution of the concept of competition in the literature has never been based on acontinued improvement process. Rather, this evolution has been characterized by someimportant ruptures, some neglects of important contributions, and even some retreats andregressions. The static nature of competition has been criticised by early authors such asHayek (1937) or Schumpeter (1912, 1942), and has motivated alternative investigations intothe process of competition in terms of discovery or selection procedures. The effect of

product differentiation on competition led to the creation of theories of imperfect competition by Chamberlin (1933) and Robinson (1933). However, on the one hand, the 'process' critiquedid not take into account the effect of product differentiation and, on the other hand, the'differentiation' critique still considered competition as a state of affairs. More recently, other

authors such as McNulty (1968), Kirzner (1973), and Richardson (1975) contributed to clarifythat it is necessary to move from a notion of competition which essentially relates to a theory


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of economic equilibrium towards a new concept of competition which is based on a theory ofeconomic evolution . This distinction is considered as crucial since, in the first case,competition has a key role to play in the balancing of supply and demand in particularmarkets, while, in the second case, competition contributes to structural and technologicaldevelopment. Within this distinction, commentators suggested also that competition is

essentially a market behaviour and not a market structure .

The positive outcome of these long debates and controversies on competition is that we havecome today to a rather consensual definition of competition, quite close to the everydaymeaning of the term 1. Competition is taken to mean that range of actions aimed at ensuringthe realization of the choices of a given firm while restraining at the same time the sphere ofactions of its rivals. Competition is a process of rivalry between firms which takes the form ofcontests within existing markets (intra-industry competition), and the form of potential entryinto new areas (inter-industry competition). Competition includes rivalry in terms of price, butalso in terms of altered or improved techniques of production or products, and in terms of the

provision of information to consumers about products. All these forms of rivalry haveconsequences for the level and rate of growth/decline of production and standards/variety ofconsumption, and for the evolution of the structures of markets themselves which areincreasingly shaped by new forms of organizations in which customers, suppliers, partnersand even competitors are involved (Krafft, 2000).

The negative counterpart, quite paradoxically, is that it is still difficult to know in what wayscompetition can promote economic development, and how more or less competition favoursor hinders economic growth. In a recent article, Blaug (2001, p. 37) asks whether competitionis such a good thing and reconsiders the usual distinction static versus dynamic efficiency.He notes that In the end-state of conception of equilibrium, the focus of attention is on thenature of the equilibrium state in which the contest between transacting agents is finallyresolved; if there is recognition of change at all, it is change in the sense of a new equilibriumof endogenous variables in response to an altered set of exogenous variables; but comparativestatics is still an end-state conception of economics. However, in the process conception ofcompetition, what is in the foreground of analysis is not the existence of equilibrium, butrather the stability of that equilibrium state. How do markets adjust when one equilibrium isdisplaced by another and at what speed will these markets converge to a new equilibrium?.According to Vickers (1995, p. 1), Despite the widespread view, which has considerableempirical support, that competition is important for productive efficiency, it is not so obviouswhy. Competition seems very well in practice, but it is not so clear how it works in theory.In what follows we argue that there is a major reason for this. The reason is that, in most of

the analyses of competition which were developed from the 1970s to the 2000s, the mainfocus was to show that competition is not simply related to the number of companies (marketstructure). However the question of how the interactions between firms within a givenindustry (intra-industry) and among different industries (inter-industry) are modified overtime was not systematically investigated.

2.1. I N THE 1970 S: T HE MYTH OF AN INCREASING CONCENTRATION The fundamental contributions provided by Hayek and Schumpeter on the process ofcompetition remained neglected for a long time. The Harvard School, and the SCP paradigm,occupied the centre scene, and it is only in the 1960s and 1970s that things started to change.The emergence of the Chicago School, as well as the early developments on the theory of

1 See entries on competition in the Palgrave : Stigler (1987); Clifton (1987); Roberts (1987); Mc Nulty (1987).


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barriers to entry, provided a new vision of competition, namely more behavioural and lessstructuralist. Authors such as Telser (1964), Benham (1972), Demsetz (1973), Posner(1977), Bork (1978), Brozen (1982) developed a series of new propositions which were instrong opposition to the Harvard School. Empirical studies on industry time-series showedthat market forces seemed to prevent by themselves the existence of dominant firms or

monopolistic competition. There was no obvious causality between small number markets andthe lack of competition, and no observable tendency to concentration over the long run. Themyth of an increasing concentration was thus significantly weakened and progressivelyreplaced by a new body of analysis. For the main authors of the Chicago School, aconcentrated industry is not necessarily a non-competitive industry. In fact, large, efficientfirms come to dominate the industry since they outperform their inefficient competitors.Moreover, entry in most industries is relatively easy and, in most cases, barriers to entry donot deter entry. In this context, market power of incumbent firms has to be evaluated withrespect to effective competition, but also potential competition. Finally, since economicsystems are recurrently faced with major changes, monopolies and oligopolies cannot beconsidered as permanent forms of industry. Rather, they emerge in a transitory manner tosecure the appropriation of gains related to innovation, but are naturally conducted todisappear over time.

2.2. I N THE 1980 S: P OTENTIAL COMPETITION AND CONTESTABILITY The theory of contestable markets developed by Baumol, Panzar and Willig (1982)contributed also to refining the relation (or the absence of relation) between competition andmarket structures. In this perspective, the notion of potential competition played a key role.This theory advocates that competition is not necessarily connected to the number of market

participants. In fact, a market is contestable (and thus competitive) when a) entry in thismarket is free, which means that new entrants come to be perfectly adapted both to thetechniques of production and quality of products which are offered in this market, and when

b) exit is also free, which means that new entrants can immediately exit without costs. Acontestable market can thus exist, and approximates the optimum, since potential competitorsare able to enter the market, obtain a profit when prices are superior to marginal costs, andexit when prices decrease either naturally with declining profit opportunities or strategicallywith increasing price competition from the incumbents. Contestability, supported by the hitand run assumption, provides firms with the adequate incentives to adopt a competitive

behaviour, and guarantees that prices will not remain over marginal costs in the long run.Contestability stresses that industry structure is intrinsically endogenously determined, withthe prevailing strategies in terms of prices, production, and marketing. This involves an

important departure from traditional conclusions, in which market structures were essentiallyexogenously determined. Monopoly and oligopoly structures are part of a natural process ofcompetition which results from the interaction between, on the one hand, the incumbents and,on the other hand, the potential competitors which create new profit opportunities, introduce aqualitative change within the existing market structure, and import novelties from otherindustries. In addition, this process of competition is favourable to consumers, who benefit ofa larger and diversified spectrum of offers.

2.3. I N THE 1990 S: I NCENTIVES AND COMPETITIVE BEHAVIOUR The theory of contestable markets was significantly complemented by the emergence of the

New Industrial Economics. Contestability theory essentially provided new developments

about the relation between market structure and technological efficiency. In this framework,technological efficiency was determined by the analysis of the production functions of


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different players (incumbents, effective entrants and potential entrants) and the prevalentmarket structure was supposed to reflect and to adapt to this efficiency. Nevertheless, inthe real world players do not necessarily behave as this model suggests. In other words, theexamination of the production side of the problem does not provide a definite analysis of how

players behave effectively. These types of behaviour are, in most cases, related to complex

patterns of incentives which may involve a gap between what firms do and what they shoulddo. In the mid-1980s, thus, the New Industrial Economics emerged as a major framework andit soon imposed another vision of competition. Competition was now analysed through thecharacteristics of different markets where strategic interactions prevail, and where a largespectrum of (conflicting) incentives drive these market behaviours. Using the apparatus ofgame theory, this approach is able to describe a complete range of market strategies, fromagreements between firms that could be either explicit or tacit, to excessive pricing, pricediscrimination, predatory pricing, patent races, and vertical restraints that can deter entry orimpose foreclosure (Phlips, 1995; Baumol, 2001; Evans and Schmalensee, 2001; Lewis andYildirim, 2002).

2.4. I N THE 2000 S: I NDUSTRIAL DYNAMICS AND QUALITATIVE CHANGE New developments on Industrial Dynamics are related to the need for an operational conceptof competition that can include the following features of industrial evolution (Klepper, 1997).Industries, like biological organisms, face different stages during their lifetime, and thesestages imply modifications in their characteristics. The first stage begins with the introductionof a new product on the market, either by the inventor or the first producer, and this periodcorresponds to the emergence of a new industry. At that time, the size of the market isnarrowly defined, and there is a high uncertainty on the future growth of this market. The

product is like a prototype without any clear definition of applications and, further, of potential demand. This first stage ends with the emergence of new producers (new entrants).The length of this period depends on the size of the market just after the introduction of the

product, on the number of potential entrants and on their ability to copy product innovation.The second stage is characterized by an increase in the number of incumbent producers.Output growth is high and the final design of the product is now available. In the third stage,net entry is around zero. Product innovation is decreasing and is replaced by processinnovation. This stage ends with the decline of gross entry rate. The fourth stage involves anegative net entry. The fifth stage reflects the maturity of the market in which a number ofincumbent firms exit from the industry: the shakeout occurs.

These developments further involve the following elements. Firstly, firms seek a selective

rather than a uniform expansion, tending to specialize in a more closely similar group ofactivities and coming to rely on sales and purchases from other businesses. Secondly, firms donot react at an identical speed, and react on the basis of different (and incomplete) sets ofinformation, as well as different incentives over time. Thirdly, qualitative change seems to bea key element in the analysis of the process of competition, and this element has long beenleft out of existing analytical frameworks.

3) ON THE NATURE OF COMPETITION.

The concept of competition we develop here is compatible with the developments in theliterature described in section 2. As pointed out in the introduction, we intend to combine the

process and qualitative change critiques of competition, the latter being the heir of the productdifferentiation critique. Furthermore, we intend not only to frame the problem at a conceptual


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level, but to provide a definition of competition which is both analytically and empiricallyuseful. Our treatment of competition is going to be essentially based on three aspects:competition as an interaction, competition and qualitative change, competition as a process.That firms interact means that the behaviour of each firm is not independent of the behaviourof other comparable firms. Firms interact because they compete for customers, in a way

extremely similar to the one by which biological species compete for resources (MaynardSmith, 1974). Let us observe here that in atomistic competition the behaviour of each firm isindependent of that of other firms. Competition here arises because the number of customersis not enough to keep all the firms in business. If the number of customers were at all timesmore than enough to absorb all the output of all incumbent firms there would be nointeraction and no competition: each firm would behave individually quite simply because itwould not need to take into account the behaviour of other firms. Thus, the existence ofcompetition as interaction depends on the 'resource' that firms are competing for. Even if suchscarcity were not there initially it would be inevitably created by the evolution of theeconomic system. If at given time the output of incumbent firms were inferior to presentdemand, and even admitting that these firms were interested or willing to expand their output,other firms would enter to exploit the existing capacity gap. Thus, the scarcity of the 'resource'competed for would be created even if it had not been there initially.

These considerations indicate already the link of competition as interaction with the other twoaspects of the problem, competition and qualitative change and competition as a process.First, firms compete for customers by means of their outputs, be they products or services.The intensity of competition is then proportional to the similarity of firms' outputs, orequivalently, inversely proportional to the heterogeneity of their potential customers. Firmsmaking shoes do not compete with firms making photographic cameras. In fact, if customerswere homogeneous there would be no sense in differentiating outputs. Again, let us remarkhere that in atomistic competition firms' outputs are identical. A range of possible situationsexist varying from a)firms producing identical outputs, to b)firms producing completelydifferent outputs, passing through a series of intermediate situations in which the degree ofsimilarity of firms' outputs varies form one to zero. Of course, this means simply thatcompetition implies substitutability. Thus competition is intimately linked to qualitativechange, which modifies firms' outputs. Second, competition is part of a process and isintrinsically dynamic. In particular, a situation in which there is no competition wouldintrinsically unstable because it would induce competition by the entry of new firms. Both ofthese aspects are going to be analysed in the following paragraphs.

We can define qualitative change as the mergence of new entities emerge within the economic

system, possible new entities being new objects (product or services), new activities (the production processes required to produce the new objects), and new actors (the new firms andall the other institutions required for the new products and services to diffuse and to acquireeconomic weight) (Saviotti, 1996; Saviotti,Pyka, 2004a). In what follows we will concentrateon the new products and services. In order to take into account the influence of the nature ofoutputs on competition in presence of qualitative change we need suitable descriptors orrepresentations of firms' outputs and of their changes in the course of time. This will allow usto determine the similarity of firms' outputs. Leaving aside for the moment the details of thisrepresentation, we can expect competition to be affected by qualitative change in thefollowing ways:


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(i) the output of any incumbent firm is likely to change in the course of time, either by differentiating products in the same industry or by starting to produce productsin one or more new industrial sectors.

(ii) Completely new types of outputs can be created and produced by new firms. Thesenew types of outputs will change in the course of time for each of the firms that

started to produce them. The intensity of competition will be affected by howsimilar, or different, firms outputs become in the course of time: increasingsimilarity will lead to increasing intensity of competition and the reverse.

(iii) A number of combinations of the previous trends can be conceived.

It can be seen right away that the previous trends and any combination of them can provideopportunities for both growing or falling intensity of competition in the course of time.

(a) when a firm innovates and differentiates its outputs with respect to those of itscompetitors it reduces the intensity of com to which it is subject and gains adegree of local and temporary monopoly. The monopoly is local because, aswe will see later, the innovation places the firm in a unique position incharacteristics space, where at the time of the introduction of the innovationthere are no competitors. However, such monopoly is limited because theoutputs of other firms can be if not in the same position at least in theneighbourhood. The monopoly is temporary because id the innovation issuccessful sooner or later some competitors will imitate.

(b) when after an innovation has been introduced other firms imitate and enter theindustry, the intensity of competition gradually rises up to a maximum.

(c) When, as it happens in an industry life cycle, there is a shake out and thenumber of firms in the industry falls, the intensity of competition decreases.

Without getting into further details we can realize that the process of economic developmentwill not be accompanied by a unidirectional change in the intensity of competition. That is,the overall intensity of competition of an economic system will neither rise continuously norfall continuously. On the contrary, we can expect within each sector alternating periods ofgrowth and fall of intensity of competition. We will discuss later the impact that this variableintensity of competition can have on economic efficiency.

From the previous considerations it follows that competition cannot be conceived as a state ofaffairs. The economic system is not static. Its composition changes in the course of time inways that both influence competition and are influenced by it. The intensity of competition ata given time is a determinant of the future economic behaviour of the system. The intensity of

competition existing in an economic system at a time t determines the development path ofthe system in the following period. For example, when the first entrepreneur creates aninnovation and establishes a firm to exploit it, the situation of temporary monopoly acts as aninducement for other firms (imitators) to enter. However, the development path thus createdinduces subsequent changes in the intensity of competition. Summarising, competition is botha determinant and a consequence of the dynamic process of economic development.Alternatively, and without excluding exogenous shocks to the system, we can say thatcompetition is a component of an endogenous process of economic development

Qualitative change is one of the most important sources of dynamism of the economic system.Without qualitative change the only possible source of dynamism would be constituted by the

growing efficiency with which a constant set of outputs can be produced. It is very doubtfulthat an economic system could develop in these circumstances, and in any case its


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development would not resemble the one we can observe. We can consider that economicdevelopment is created by the two distinguishable but complementary trends towards (i)growing efficiency and (ii) growing variety (Saviotti, 1996), or, in other words, by efficiencyand creativity. The combination of these two trends provides opportunities for both rising andfalling intensity of competition, with growing efficiency tending to raise the intensity of

competition and growing variety tending to reduce it.

Summarising this section, we can say that competition is an interaction, that the intensity ofsuch an interaction depends on the similarity of firms' outputs, that firms' outputs are modifiedin the course of time by qualitative change, that the dynamics of qualitative change gives riseto a process in which competition is both a determinant and a consequence of economicdevelopment. In the following section we provide a more analytic treatment of all the

previous concepts.

3.1) T HE INTENSITY OF COMPETITION .The starting point of an operational definition of competition is a representation of outputs(products and services) in characteristics space. This is a modified version of Lancaster'sapproach, as developed by Saviotti, Metcalfe (1984). In this framework each product isrepresented by two sets of characteristics, one describing the internal structure of the product(technical characteristics) and the second the services performed for the users (servicecharacteristics). This representation can find a theoretical justification both in terms ofHerbert Simon's (1969) ideas and based on a complex systems approach (Frenken, 2001).This representation gives us the possibility to represent all heterogeneous, multicharacteristicsfirms' outputs in a characteristics space. In particular, we will mostly use a representation inservice space, because it is in this space that demand is formed and that selection andcompetition take place. Thus, two technologies occupying different dimensions in technicalcharacteristics space, might supply similar services and thus compete. The product models ofdifferent firms can be expected to differ for at least the level of services supplied, and willthus be represented by different points in service characteristics space. The output of a set offirms producing an heterogeneous multicharacteristics product will thus be a cloud of points,each point corresponding to a product model. An industrial sector will be the set of firms

producing a common but differentiated product. An industrial sector will thus be represented by a population of firms and by a population of product models. The latter population will beanalysed more often in this paper because outputs influence competition in a most direct way.It is outputs that are selected by consumers and users, and this selection process determinesdifferential firm survival. Of course, firms' activities are a determinant of firms' outputs. Forexample, the knowledge base (KB) of a firm determines the nature of its outputs, that is of the

Revealed Technological Performance (RTP) that the firm can produce at a later time.Schematically:

KB (t 1) RTP (t 2) (t 2 > t1)

Thus, when consumers and users select given product models they directly select an RTP andindirectly select the corresponding KB. In this paper we will concentrate exclusively on RTP,as represented by product models' characteristics. In this framework the intensity ofcompetition between the products of two firms will be directly proportional to their similarity,or inversely proportional to their distance (Fig. 2).


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Y2

Y1

P 1

P 2

Fig. 2. Representation of two product populations (P 1 and P 2 ), corresponding to two

industrial sectors, in service characteristics space.

Competition as experienced by any producer will be constituted by two components, intra-sector or intra-industry competition, and inter-sector- or inter- industry competition. We canexpect the intensity of intra-industry competition to be directly proportional to the density ofthe population of products in service characteristics space. The denser the population, themore similar product models are and the more products that can be considered closesubstitutes there are within the population. Inter industry competition can be expected to be

inversely proportional to the distance between two different and separable populations of products in service characteristics space. The overall intensity of competition must bedetermined not only by the number of firms, as it would have been the case in the SCPapproach, but also by intra- and inter- industry competition. As a consequence, the intensityof competition as experienced by any producer in a sector i will be function of three variables:

(1) IC i = f[N i, i, D y(i,j)]

Where N i is the number of firms in sector i, i is the density of products/services in servicecharacteristics space and D y(i,j) is the distance between the product populationscorresponding to two different sectors. The form of IC i is left implicit in Eq. 1, but it can be

made explicit and used to calculate actual values and time paths of intensity of competition(Saviotti, Pyka, 2004a).

Having established this general representation of products and of competition let us go backto the process aspect of competition by considering competition as an interaction. When firmsinteract the result is likely to change the state of all of them. In other words, any systemconstituted by a number of interacting firms is likely to be intrinsically unstable and to lead toa dynamics in which the subsequent states of the interacting firms change until the systemreaches a state of rest. Competition as an interaction then works by creating a potential,characterized for example by a high intensity of competition, which drives the system tosubsequently lower values of intensity of competition. This does not mean that the intensity ofcompetition IC i will tend to fall at all times, but only that there is a tendency internal to sectori, that is manifesting itself to the extent that sector i is isolated, towards the reduction of IC i.


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This internal tendency can be compensated by other factors leading to a more complicatedtime path for IC i. In particular, the overall IC in any sector will depend on the contributions ofintra- and inter- sector IC. In particular, if the sector is not isolated, inter-industry competitionwill be superimposed on intra-industry competition.

From here onwards the analysis of the dynamics of competition is based on the results of amodel of economic development by the creation of new sectors in which competition plays anessential role (Saviotti, Pyka, 2004a, 2004b). We can begin analysing the process when anentrepreneur creates a niche by introducing an innovation in the hope of achieving atemporary monopoly. When the entrepreneur introduces an innovation he/she creates anadjustment gap , a potential market that is initially empty since there is no production capacityto satisfy this potential demand. The size of the adjustment gap acts as an inducement forentry. Imitative entry gradually reduces the degree of temporary monopoly and raises ICwithin the sector, up to the point where the sector does not attract any more entry and mayeven encourage exit. Exit is here induced by increasing IC i. In absence of interactions withother sectors or of the creation of new sectors, subsequent development would proceed byreducing the number of firms in the sector until a configuration of rest is achieved, usually anoligopoly or a monopoly. However, such a development path would make the systemunstable unless new sectors were created (Saviotti, 1996; Saviotti, Pyka, 2004a, 2004b).Economic development then proceeds by means of the creation of further niches, at leastsome of which will subsequently become new sectors. Within this model of economicdevelopment there is a competition based life cycle, characterised by the interplay of thetendency of entrepreneurs to achieve a temporary monopoly, followed by imitative entry thatraises IC i, and finally by the 'saturation' of the sector leading to a reduction in the intra-sectorIC i. The cycle starts all over again as other entrepreneurs create new niches. The results of themodel referred to above show that while there is an intrinsic tendency towards the long runfall of IC i within the sector, this can be compensated by inter-sector IC, that keeps IC i at ahigh level all the times (Fig. 3).

Fig. 3. Evolution of the intensity of competition in different sectors .

The development path of each sector can be recast in terms of competition as a form ofinteraction. To the extent that consumers' preferences are differentiated the market is nothomogeneous, but it is separated into a number of niches. Each niche is sufficiently small to

be considered internally homogeneous, so that all consumers present within it are assumed tohave equal preferences. According to niche theory as used in biology (Roughgarden 1996;May, 1974), only one species can survive in a niche. Thus we can expect the niche created byan entrepreneur either to saturate and not to be able to support a large number of producers, inthe limit only one, or to grow into a fully fledged market, containing an increasing number ofniches. We can expect the intensity of competition IC i to increase first and then to fall within


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measure of the degree of firms' outputs within a sector and in different sectors. In this way weintroduce a distinction between intra-sector competition and inter-sector competition. Theoverall intensity of competition experience by a firm in a particular sector is the combinationof intra- and inter- sector intensity of competition. The definition of the intensity ofcompetition we propose is in principle empirically applicable and useful for modelling

purposes. In this paper we quote some results from a model of economic development by thecreation of new sectors incorporating this definition of the intensity of competition.

This particular framework has the following advantages: (i) it provides a unique modelencompassing both Classical and Schumpeterian competition as two extremes of a range,within which one can find the types of competition present in economic systems, and (ii) it

provides a potentially operational definition of the intensity of competition, provided that therequired data on output characteristics are available.

The framework developed here stresses the influence of qualitative change and of its dynamicaspects. In particular, it combines the effects of qualitative change with a process approach.Competition is dynamic because its intensity in a given state of the system determines thesubsequent evolution of the system. In turn, the next state of the system induces changes inthe intensity of competition. The process continues until the system comes to a state of rest.Thus, the first entrepreneur creates a niche induced by the expectation of a temporarymonopoly. If the innovation introduced by the entrepreneur is successful imitative entryfollows, thus raising the intensity of competition and reducing further inducement to entry.Qualitative change plays a central role in creating and sustaining this process: first by creatingthe innovation that leads to the new sector, and, second, by determining the subsequentevolution of the sector by means of the changes introduced during the life cycle of theinnovation.

Our concept of competition is closely related to Schumpeter's work, both because innovation,creating qualitative change, is a form of disequilibrium, and because it is a form of creativedestruction, from which some economic actors benefit while others may be destroyed from it.Our concept of competition is compatible with Schumpeter's work, but extends it by

providing an explicit account of the effects of product differentiation within an industry andof inter-industry competition, thus incorporating market contestability within a Schumpeterianframework.

Our concept of competition allows us to analyse in a different way the relationship betweencompetition, efficiency and growth. By referring to the results of a model of economic

development by the creation of new sectors, we show that the role of competition can varydepending on the situation, and in particular on the phase of the industry life cycle. Forexample, a new sector is created by an entrepreneur induced by the expectation of atemporary monopoly. Thus, the process of creation of new sectors benefits from the absenceor from a very low intensity of competition. Conversely, once a new sector is created andstabilised it is quite likely that competition favours the subsequent development of it. Ouranalysis of this problem is preliminary, but it has some important policy implications.


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Pier-paolo-saviotti Towards a Generalised Definition of Competitiveness f Important Evolutia...

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