Richard G. Lipsey

The General Theory of Second Best

There is an important basic similarity underlying a number of recent works in apparently widely separated fields of economic theory. Upon examination, it would appear that the authors have been rediscovering, in some of the many guises given it by various specific problems, a single general theorem. This theorem forms the core of what may be called The General Theory of Second Best. Although the main principles of the theory of second best have undoubtedly gained wide acceptance, no general statement of them seems to exist. Furthermore, the principles often seem to be forgotten in the context of specific problems and, when they are rediscovered and stated in the form pertinent to some problem, this seems to evoke expressions of surprise and doubt rather than of immediate agreement and satisfaction at the discovery of yet another application of the already accepted generalizations.

The Theory of Market Pre-emption: The Persistence of Excess Capacity and Monopoly in Growing Spatial Markets

It was not inevitable that it [Alcoal should always anticipate increases in demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors, but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face each new comer with new capacity already geared into a giant organization ... .I

Capital, Commitment, and Entry Equilibrium

A primary concern of recent oligopoly literature has been the use of product-specific capital to impose asymmetric market solutions, including the deterrence of entry. This article explores the surprisingly neglected topic of the correspondence between the nature of product-specific capital (PSC) and the properties of entry equilibrium. The nature of PSC determines the type of entry with which firms must be concerned (predatory entry, where the entrant replaces an existing firm, or augmenting entry, where the entrant does not), the instruments available to effect asymmetry, the ability to impose asymmetric solutions, and their profitability.

Address Models of Value Theory

We argue that small group competition among overlapping oligopolies is the predominate market form in modern society applicable whenever goods are located by their address in some relevant space: characteristic space for monopolistic competition and geographic space for spatial competition. Predictions from models where there are a continuum of possible goods are radically different from those with a finite number of goods. In address models, competition is localized; there is a range of free entry equilibria which include zero profits at one extreme and very large profits at the other.

The block metric and the law of markets

Abstract The “Law of Markets” as originally stated by Fetter and amended by Hyson and Hyson is based on the assumption that the transportation of goods is along a line segment from firm to customer. In many situations the assumption that transportation is along a block-like network of roads is a better approximation of reality. In this paper we establish the “law of markets” appropriate to the block metric. We discover that with such a metric there exist significant discontinuities in a firms demand functions and we argue that these discontinuities have important implications for the types of competitive strategies open to firms.

McManus on Second Best

Dr. McManus’s comments1 on our paper2 provide some valuable extensions to our original propositions, and his geometric treatment a useful alternative approach for those who prefer a technique of this kind. His chief point of criticism, that our ‘numeraire’ has not the degree of arbitrariness necessary for it to be so named, is well taken8 and our paper stands amended in that respect.

A Comment on Location and Industrial Efficiency with Free Entry

We consider Gees model of industrial location and prove analytically that, given Gees assumption of price discrimination, firms always wish to locate in the centres of their markets. This contrasts the result for mill-price-plus-transport-cost pricing where firm locate in the centres of interior markets, but not in the centres of peripheral markets. We also show that other of Gees results depend on his omission of a key equilibrium condition with respect to the relocation of firms already in the market. We reassert the propositions challenged by Gee, that pricing behaviour and the existence or non-existence of boundaries to the whole market critically affect the results derived from a broad class of industrial location models.