The emergence of the concept of perfect competition
Finally, the credit of making the first effort to set down a set of conditions for perfect competition goes to Frank Knight (in 1921), and it should also be noted that he himself did not believe in it.
He prepared the way for the definition of perfect competition, as well as for the reaction in the 1930s against the theory of perfectly competitive markets. In 1923 John Maurice Clark emphasized that the presence of scale economies due to overhead costs would weaken potential competition and criticized the “ruinous competition” theory. He was so strongly in favour of a considerable state intervention that in 1912, in the revised edition of his father’s book, now co-authored by both of them, the previous criticisms of antitrust action disappeared. As already mentioned, in 1926 Sraffa criticized Marshall, showing the incompatibility of scale economies with perfect competition, and suggested abandoning the hypothesis of perfectly competitive markets: in the 1930s his criticism opened the way to Joan Robinson’s (1933) imperfect competition revolution. Just before this revolution, the history of the attempts to determine equilibrium prices and quantities in imperfectly competitive markets went on with Harald Hotelling (in 1929), who built a model of spatially differentiated duopoly. To sum up, before 1930 the economists’ treatment of hybrid situations between monopoly and perfect competition was much broader than that of the two extreme cases, one of which (perfect competition) had not yet been put forward.