<blockquote>
<p>It seems to me that a world of optimizing consumers facing optimizing firms should not have room for the sort of diversity we see around us. Or does it?</p>
</blockquote>
<p>That is not correct perception.</p>
<p>For example, in standard graduate level industrial organization textbook such as Tirole The Theory of Industrial Organization, in chapter 2, you are introduced to notion of product space that can be used to build models of competition with infinitely many differentiated products.</p>
<p>Moreover, techniques introduced there can be used to model both horizontal and vertical differentiation.</p>
<p>Finally, it’s strange that you think that somehow optimization doesn’t have room for diversity. It’s trivial to see that optimizing agents with different preferences will prefer different mix of products or that optimizing firms with different technologies will specialize in different niches or choose different sizes. You can easily show that even in undergraduate models for special cases of few selected types. An example of duopoly with different technologies which results in different firm size (as measured by market share) can be found in virtually every undergraduate textbook. In graduate level models you can have literally infinite variety in goods.</p>
<p>PS: At the beginning of your question you clearly talk about perfectly competitive markets not just any competitive industrial structure. In perfectly competitive market good has to be homogeneous. If you are looking at a market without homogeneous good you can automatically conclude it’s not perfectly competitive market (e.g. similarly by definition monopoly is one seller so if you see market with two or more firms you can immediately conclude it’s not monopoly).</p>

CC BY-SA 4.0
2024-06-16T01:14:31.797Z
2024-06-16T01:14:31.797Z
1muflon1
<blockquote>
<p>In the theory of the firm as I learned it, firms all have access to the same technology and all choose to be the same size. If a firm doubles or halves in size, or raises its price a few percent, its profits or sales or both fall to zero.</p>
</blockquote>
<p>Chances are you have learned this in an intro to microeconomics class, or a class that just touches on microeconomics to talk about something else. This is the 'perfect competition' model, and 'perfect' is meant to convey some unattainable ideal that you will never see in the real world. It is useful as a demonstration tool to talk about some aspects of market dynamics, but it does leave out a lot of details. It is completely inadequate to address e.g. modern markets with platforms.</p>
<blockquote>
<p>Is there some other economics (graduate economics maybe?) that corresponds to and predicts a world more like the one I see around me, one where firms which are diverse in many characteristics can nonetheless survive and coexist, one where households differ in their saving behavior and their purchase of insurance, and few settle on a single optimal kind of soup and afterwards buy that kind and no other.</p>
</blockquote>
<p>There are many models that admit for heterogeneity of all sorts; different cost functions, consumers different in some attributes etc. However it is in the nature of models to simplify, so few incorporate more than a few heterogeneity parameters at the same time.</p>
<blockquote>
<p>a world more like the one I see around me</p>
</blockquote>
<p>IMO microeconomics is not very good at this; there is also a somehat widespread perception that while micro tends to be rigorous and sometimes even elegant, its predictions do not match the real world.</p>
<p><a href="https://i.sstatic.net/YjrAtNYx.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/YjrAtNYx.png" alt="enter image description here" /></a></p>
<p><a href="https://www.smbc-comics.com/comic/2013-09-19" rel="nofollow noreferrer">source of image</a></p>
<p>There are of course some trivialities where they do, or if you look at the prediction in a general enough way.</p>

CC BY-SA 4.0
2024-06-16T06:54:12.323Z
2024-07-16T09:06:38.630Z
2024-07-16T09:06:38.630Z
Giskard
<p>I look at the world around me and I see that in every industry there are firms of very different sizes. Firms compete on price and features and at any given moment in time similar products with prices that are not too different can coexist in the same market. Firms differ in their profitability and in their rates of retained earnings and payout to shareholders.</p>
<p>I do not understand how, in a competitive market, <em>ANY</em> of those things can be true.</p>
<p>In the theory of the firm as I learned it, firms all have access to the same technology and all choose to be the same size. If a firm doubles or halves in size, or raises its price a few percent, its profits or sales or both fall to zero.</p>
<p>My question: Is there some other economics (graduate economics maybe?) that corresponds to and predicts a world more like the one I see around me, one where firms which are diverse in many characteristics can nonetheless survive and coexist, one where households differ in their saving behavior and their purchase of insurance, and few settle on a single optimal kind of soup and afterwards buy that kind and no other.</p>
<p>It seems to me that a world of optimizing consumers facing optimizing firms should not have room for the sort of diversity we see around us. Or does it?</p>

<industrial-organisation><monopolistic-competition><economies-of-scale><product-differentiation>
Is there another economics?
andrewH
# Is there another economics?

(Asked by: username_0 on 2024-06-16)

I look at the world around me and I see that in every industry there are firms of very different sizes. Firms compete on price and features and at any given moment in time similar products with prices that are not too different can coexist in the same market. Firms differ in their profitability and in their rates of retained earnings and payout to shareholders.

I do not understand how, in a competitive market, *ANY* of those things can be true.

In the theory of the firm as I learned it, firms all have access to the same technology and all choose to be the same size. If a firm doubles or halves in size, or raises its price a few percent, its profits or sales or both fall to zero.

My question: Is there some other economics (graduate economics maybe?) that corresponds to and predicts a world more like the one I see around me, one where firms which are diverse in many characteristics can nonetheless survive and coexist, one where households differ in their saving behavior and their purchase of insurance, and few settle on a single optimal kind of soup and afterwards buy that kind and no other.

It seems to me that a world of optimizing consumers facing optimizing firms should not have room for the sort of diversity we see around us. Or does it?

**Tags:** industrial-organisation, monopolistic-competition, economies-of-scale, product-differentiation


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## 2 answers

### Answer by username_1 on 2024-06-16. Score: 0

> It seems to me that a world of optimizing consumers facing optimizing firms should not have room for the sort of diversity we see around us. Or does it?

That is not correct perception.

For example, in standard graduate level industrial organization textbook such as Tirole The Theory of Industrial Organization, in chapter 2, you are introduced to notion of product space that can be used to build models of competition with infinitely many differentiated products.

Moreover, techniques introduced there can be used to model both horizontal and vertical differentiation.

Finally, it’s strange that you think that somehow optimization doesn’t have room for diversity. It’s trivial to see that optimizing agents with different preferences will prefer different mix of products or that optimizing firms with different technologies will specialize in different niches or choose different sizes. You can easily show that even in undergraduate models for special cases of few selected types. An example of duopoly with different technologies which results in different firm size (as measured by market share) can be found in virtually every undergraduate textbook. In graduate level models you can have literally infinite variety in goods.

PS: At the beginning of your question you clearly talk about perfectly competitive markets not just any competitive industrial structure. In perfectly competitive market good has to be homogeneous. If you are looking at a market without homogeneous good you can automatically conclude it’s not perfectly competitive market (e.g. similarly by definition monopoly is one seller so if you see market with two or more firms you can immediately conclude it’s not monopoly).


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### Answer by username_2 on 2024-06-16. Score: 0

> In the theory of the firm as I learned it, firms all have access to the same technology and all choose to be the same size. If a firm doubles or halves in size, or raises its price a few percent, its profits or sales or both fall to zero.

Chances are you have learned this in an intro to microeconomics class, or a class that just touches on microeconomics to talk about something else. This is the 'perfect competition' model, and 'perfect' is meant to convey some unattainable ideal that you will never see in the real world. It is useful as a demonstration tool to talk about some aspects of market dynamics, but it does leave out a lot of details. It is completely inadequate to address e.g. modern markets with platforms.

> Is there some other economics (graduate economics maybe?) that corresponds to and predicts a world more like the one I see around me, one where firms which are diverse in many characteristics can nonetheless survive and coexist, one where households differ in their saving behavior and their purchase of insurance, and few settle on a single optimal kind of soup and afterwards buy that kind and no other.

There are many models that admit for heterogeneity of all sorts; different cost functions, consumers different in some attributes etc. However it is in the nature of models to simplify, so few incorporate more than a few heterogeneity parameters at the same time.

> a world more like the one I see around me

IMO microeconomics is not very good at this; there is also a somehat widespread perception that while micro tends to be rigorous and sometimes even elegant, its predictions do not match the real world.

[![enter image description here](https://i.sstatic.net/YjrAtNYx.png)](https://i.sstatic.net/YjrAtNYx.png)

[source of image](https://www.smbc-comics.com/comic/2013-09-19)

There are of course some trivialities where they do, or if you look at the prediction in a general enough way.


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