The reason is not just that competition in real world markets falls far short of the imaginary “perfect competition” of neoclassical theory, but because most prices are mark-up prices and businesses are almost always setting them to make a profit. Even new entrants into a particular market where mark-up pricing exists will generally set their price to make a profit as a mark-up over costs of production. The profit will not be competed away.
As Lee notes,
“… business enterprises do not consider profits as part of costs. Consequently, the typical statement made by Sraffians and Marxists that prices equal their costs of production (which includes a uniform rate of profit) in long-period positions has no conceptual correspondence to the concepts of costs and prices used by business enterprises. Without this link, the Sraffian and Marxian theory of prices cease to be grounded in the real world inhabited by actual business enterprises and their costing and pricing procedures.” (Lee 1998: 204, n. 10).But it is not just Sraffians and Marxists who make serious errors on this subject: neoclassicals and Austrians also think prices tend to be driven towards marginal cost in competitive markets, and profits will be competed away in a convergence towards an equilibrium state (which itself will not be reached), whether it is the Austrian “final state of rest” or Walrasian general equilibrium.
BIBLIOGRAPHY
Lee, Frederic S. 1998. Post Keynesian Price Theory. Cambridge University Press, Cambridge and New York.
