Criterion 2: Competition and Monopoly

Any economics textbook worthy of the name should explain the role of competition in promoting efficiency and spurring the search for improved products and technologies. It should also explore the implications of the absence of competition, i.e., monopoly. The student should understand how the incentives and behavior of a monopolist differ from that of a competitive firm.

A text that relies on the discredited model of "pure" or "perfect" competition—sadly, a common error in spite of decades of withering criticism of the concept—is seriously flawed. This model assumes that a competitive market is one in which information is perfect and universal and every producer is too tiny to have an impact on price. By this definition, every market will be found deficient no matter how intense the competition between rival firms. Most economists today understand that the pure or perfect competition model is a fantasy; an unfair yardstick against which to judge the real-world marketplace.

Another pitfall to avoid is reinforcing the common notion that monopolies are easy to create and maintain in a market with open entry. What history actually shows is that it is risky and costly to try to monopolize a market with unrestricted entry. This is why those who want to collude tend to use politics to stifle competition. The key to long-lasting monopoly has always been protective government action.

The question of whether the government needs to regulate competition through the Antitrust Division of the Federal Trade Commission should be critically examined, not taken for granted. The student should understand that laws and regulations aimed at protecting competition can be used to protect competitors against competition.