Metroeconomica 57:3 (2006)

286302

STEINDL ON IMPERFECT COMPETITION: THE ROLE OF

TECHNICAL CHANGE
Harry Bloch*
Curtin University of Technology
(February 2004; revised November 2004)

ABSTRACT
Josef Steindl offers an innovative dynamic analysis of competition in Maturity and Stagnation in American Capitalism, with a key role for technical change. However, in his later writings he suggests that he
had not gone far enough and that his account was not sufficiently dynamic, noting particularly his
neglect of fundamental issues in technological development. Here, we critically examine the nature of
technical change in Steindls analysis, pointing to ambiguities and contradictions that arise. Standard
characterizations of the nature of technical change are then introduced and used to further integrate
technical change into Steindls analysis of competition.

1. INTRODUCTION

In his classic treatise explaining stagnation in American capitalism during the

interwar period, Steindl ([1952] 1976) offers a distinctive analysis of imperfect competition. In this analysis, firms have restricted access to external
funding for growth. Further, there are cost differences across firms competing in the same industry, implying that firms have differential ability to invest
and grow through internal accumulation. The result is a process of competition that evolves from the growth of productive capacity and its interaction
with industry demand. Stagnation occurs when competition leads to the
widespread emergence of oligopoly, impeding both further aggressive competition and continued expansion of capacity.
Steindls dynamic analysis of competition compares most favourably with
the neoclassical analysis of competitive or imperfectly competitive equilib* An earlier version of the paper was presented at the Conference in Honour of Josef Steindl,
Vienna Austria, 46 September 2003. Helpful comments from participants, especially Alois
Guger, Tracy Mott and Nina Shapiro, are gratefully acknowledged, as are separate comments
from John Finch and two anonymous referees.
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rium as developed from Marshall ([1891] 1961) by Chamberlin (1933) and

Robinson (1933), which still dominates the economic mainstream. In this
neoclassical theory, the function of the firm is reduced to a type of mechanical adjustment to operating consistently with the solution of conditions for
profit maximization. Steindl makes no assumption of firm prescience nor
does he impose equilibrium. Instead, equilibrium only emerges when an
industry matures into a surviving group of a few leading firms with roughly
equal costs. Until the industry matures, firm behaviour, including whether
they behave aggressively or cooperatively with their rivals, depends on the
firms position in terms of relative cost and excess capacity.1
Steindls analysis clearly recognizes the importance of technical change in
the process of competition. First, he attributes the position of low-cost firms,
at least in part, to their initiation of new methods of production. Hence, he
refers to them as progressive firms and distinguishes their behaviour from
that of their higher-cost rivals. Second, ongoing technical change leads to
continuous cost reductions, enhancing the amount of internal accumulation
for all firms. This acceleration of internal accumulation is what eventually
leads to aggressive competition by progressive firms and the elimination of
high-cost firms.2
While technical change features more prominently in Steindls analysis
than in mainstream treatments of imperfect competition, its role is still
limited. The present paper critically examines the nature of technical change
in Steindls analysis, pointing to ambiguities and contradictions that arise.
Some standard characterizations of the nature of technical change are then
introduced and used to further integrate technical change into the analysis
of imperfect competition.
First, we consider the link between technical change and internal accumulation in Steindls dynamic analysis of competition. Here, technical
change results in a positive relationship between the rate of cost reduction
and the rate of internal accumulation, providing extra cumulative causation
to Steindls dynamics. The greater the amount of internal accumulation in
this case, the greater are the rate of technical change and fall in production
costs.
We also consider the possibility that technical change depends on competition. In particular, we consider the possibility that progressive firms explicitly use development of technology as a means of aggressive competition,
1

Bloch (2000a) discusses at length Steindls analysis of imperfect competition and its relationship to contemporary and subsequent analyses.
2
Bloch (2000b) compares Steindls ([1952] 1976) analysis of progressive firms and the dynamics of competition to Schumpeters ([1934] 1961, [1942] 1950) analysis of creative destruction.

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leading to the development of new products. Alternatively, the entry of new

firms may be associated with the introduction of new process or product technology. Steindl acknowledges this possibility in his later writings (see, e.g.
Steindl, 1990, p. 313).
Our analysis of the implications of technical change for Steindls analysis
of imperfect competition focuses on three alternative standard characterizations of the process of technical change. These are technical change that
requires investment in new equipment (capital-embodied technical change),
technical change that occurs with the knowledge generated in the process of
production (learning by doing) and technical change that is proprietary to a
single firm (innovation). We choose these characterizations to emphasize different conceptions regarding technical development.
In the first characterization of technical change, we locate the development
of technology outside the firm (and industry), but require action (most
notably, investment in new equipment) by the firm to achieve productivity
improvements. In the second, we locate the technical development within the
firm (or across firms in the case of knowledge spillovers), but require no specific action on the part of the firm to achieve productivity improvements
(learning by doing is treated as a tacit process). Finally, with innovation we
locate technical development within the firm (or across firms with spillovers),
as a result of action on the part of the firm to achieve the productivity
improvements (i.e. innovation is a strategic behaviour by firms).
In section 2 below, the basic elements of Steindls ([1952] 1976) analysis of
imperfect competition are reviewed, with emphasis on the role of technical
change. Section 3 examines the implications for imperfect competition of the
three alternative characterizations of the process of technology development.
A concluding section provides an overview of the findings as well as suggestions for further research.

2. STEINDLS ANALYSIS

2.1

Initial observations

Steindl ([1952] 1976) begins his analysis of imperfect competition with

three observations. First, he notes the widespread occurrence of excess
capacity. He argues that the levels of excess capacity are generally well above
what might be needed to meet fluctuations in demand (Steindl, [1952] 1976,
p. 4).
Second, he notes a tendency towards price rigidity. What Steindl means by
price rigidity is clarified as, rigid prices hardly show any influence of the

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trade cycle (Steindl, [1952] 1976, p. 15). The essential implication of price
rigidity for the purpose of examining the impact of technical change on
dynamic competition is that firms capture the gains from cost-saving technology, at least in the first instance.3
Finally, Steindl notes large differences in costs across firms in the same
industry. He argues that unit cost decreases with firm size, using prior studies
and his own examination of US data for firm costs grouped by size (see
Steindl, [1952] 1976, table 6, pp. 2635). He further suggests that the lower
unit costs for large firms cannot be obtained by all firms due to the scarcity
of big units of capital. The argument for the scarcity of big units of capital
is drawn from his earlier monograph, Small and Big Business (Steindl, 1945),
which is in turn related to Kaleckis (1937) principle of increasing risk.4
The implications of cost differentials in Steindls analysis depend on the
actual or potential competitive pressure in an industry. When there is excess
capacity in the industry, the pressure is actual and a struggle for survival is
likely, in which probably the highest cost producer, called the marginal firm,
is eliminated. However, in many industries the competitive pressure is not
actual and the marginal firm is making considerable profits (Steindl, [1952]
1976, p. 38).

2.2

The pattern of competition

The differential profits of progressive and marginal firms, which can be considered as differential rents, provide the foundation for Steindls analysis of
the pattern of competition. He links the profits to the expansion of a firms
productive capacity through making critical assumptions about investment
spending. In particular, he assumes that the increase in the entrepreneurial
capital of firms is through what he calls internal accumulation, namely by
retaining part of the profits in the form of saving. Further, he assumes that
firms invest only in their own industry (Steindl, [1952] 1976, p. 41). Thus, the

Steindl bases his observations and analysis on the interwar period in which prices of manufacturing inputs were stable or declining. In his analysis, product prices are stable unless something causes them to change, namely competitive pressure brought on by excess capacity.
Correspondingly, under conditions of rising input prices product prices would rise at the average
price of inputs. This equates to the case of pricing based on normal costs without allowance for
productivity improvements.
4
Whether the scarcity of big units of capital is still relevant in the 21st century is arguable.
However, limited knowledge and experience of firms still provide a rationale for a preference to
invest retained profits in the industry in which they have been generated.

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normal circumstance is that internal accumulation is spent on the expansion

of capacity in the firms original business.5
A positive link between realized profitability and investment is a common
feature of investment models, especially in empirical studies. However,
Steindls analysis is distinguished from these models as he also examines the
impact of investment on competition, which in turn impacts back on profitability. This creates a dynamic analysis that involves evolution in the pattern
of competition.
Steindl argues that firms with relatively low costs and greater profit
margins expand their capacity relative to other firms. Whether this relative
capacity expansion leads to a change in the intensity of competition depends
on the magnitude of total capacity expansion compared with the expansion
in industry demand. Four cases are distinguished.
First, when the industry is expanding sufficiently rapidly, the expansion
of intramarginal firms is less than required to meet the growth in industry
output. Marginal firms have no net profits and are not in a position to finance
expansion through internal accumulation. However, Steindl argues that
entry of additional small producers will maintain or increase the share of
small firms. In this case, there is ample demand for the output of expanding
firms and no need for them to intensify competition with the marginal
firms. In this phase of the pattern of competition there is low competitive
pressure.
Second, Steindl considers a case where the expansion of the intramarginal
firms exceeds the rate of growth of industry demand. Here, he notes that the
intramarginal firms need to undertake extra sales effort. He goes on to note
that while the extra sales effort reduces the profit margins for the intramarginal
firms, it does not completely remove their differential advantage or internal
accumulation. In this phase of the pattern of competition there is moderate
5

Steindl justifies the investment in the same line of business by noting that this is what the firm
knows best. However, in the preface to the new edition of Maturity and Stagnation in American
Capitalism, he acknowledges the restrictiveness of this assumption when he notes that, The big
corporations have generally spread their activities to several lines each. Impediments against
the flow of funds should therefore play no role today (Steindl, 1987, p. xii). For studying the
process of competition within an industry, we still find it useful to follow Steindls initial assumption of restricting investment to the original line of business. This allows us to see more clearly
the implications of the linkage between investment and technical change. Considering the spread
of investment over several industries would tend to obscure, but not completely remove, these
implications. However, as noted by a referee, the linkage between firms differential profitability, investment and technological cost reductions is broken when firms choose the destination
of their investment without regard to previous experience, only looking to the rate of return
earned by incumbents in that industry. In this case it is no longer possible to deduce the evolution of firm structure in an industry.

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competitive pressure, leading to the relative concentration of the industry

as the intramarginal firms are expanding relative to the marginal firms as a
group.6
Third, Steindl considers as a special case a situation in which the
internal accumulation of large firms surpasses the rate of expansion of the
industry by enough to require diminished absolute size for marginal firms
(Steindl, [1952] 1976, p. 42). If growth of expanding firms is beyond this
critical level, then the large firms sales effort becomes so intense that other
firms are actually losing sales, and are therefore forced to cut prices or
increase cost by quality competition or more intensive advertisement. This
leads to elimination of the highest cost firms from the industry. Steindl refers
to this phase of the pattern of competition as absolute concentration. It
represents the most aggressive competitive pressure in Steindls pattern of
competition.
Steindl combines the three cases above into an ideal pattern of competition, which leads in turn to a fourth case, where competition is replaced by
oligopoly. During the ideal pattern of competition, internal accumulation
and competitive pressure interact to regulate the level of excess capacity in
the industry. When the internal accumulation by intramarginal firms is below
the rate of growth of industry demand, competitive pressure is low and profit
margins tend to rise with the introduction of cost-reducing technical change.
This raises the rate of internal accumulation, such that the utilization of
capacity eventually falls below its planned level. Intensification of competitive pressure ensues that reduces profit margins, and hence internal accumulation, while at the same time potentially causing the elimination of some
capacity held by marginal firms. Steindl notes that his analysis of an ideal
pattern of competition implies that the rate of internal accumulation is
limited by the rate of expansion of the industry together with any increase
in capital intensity (Steindl, [1952] 1976, p. 50).
In the fourth case, with oligopoly, the working of competition is considerably impaired. Here, even the marginal producers may be larger than what
would be called small firms. This means it will be difficult for low-cost firms
to drive the marginal producers from the industry without reducing their own
profit rates considerably. The implications are clear to Steindl, aggressive
competition comes to an end.

The extra sales effort, either in the form of aggressive marketing or in the form of reduced
prices, will tend to increase the rate of growth of industry sales. This will make some room for
extra output from the marginal firms without reducing output from marginal firms. However,
there is still an increase in the relative size of the intramarginal firms, else the extra sales effort
of these firms would not have been necessary.

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Competition in Steindls ideal pattern is self-destructive. Aggressive competition in the phase of absolute concentration is not unlimited. Eventually,
the elimination of marginal firms leaves a survivor group of large firms with
similar low costs. These firms recognize the difficulty of driving each other
from the industry and abstain from further aggressive competition. Avoidance of aggressive price competition by the surviving firms in Steindls analysis is perhaps best understood as learned behaviour, similar to behaviour of
rational players in a repeated non-cooperative game with a fixed number of
players. Overt collusion could give the same result. However, Steindl is silent
on explaining the mechanism by which firms are able to avoid the prisoners
dilemma outcome of aggressive competition.
The surviving firms also abstain from increasing capacity beyond the
growth of demand. The behaviour of firms in this ultimate phase of competition matches that of firms in industries where entry is difficult for reasons
of economies of scale or other barriers. Thus, oligopoly becomes a condition towards which industry evolves. It is this tendency towards oligopoly as
the conclusion to the process of competition that provides the distinctive
feature of Steindls analysis of imperfect competition.

2.3

The role of technical change

Steindl starts his analysis of the process of competition by stating that technical progress and cost reductions are an essential part of development
(Steindl, [1952] 1976, p. 40). As noted above, cost-reducing technical change,
as well economies of large scale, can be the source of cost advantages for
some firms.7 Indeed, Steindl identifies a special group of firms that lead in
productivity increases and reduced costs, which he calls progressive firms
(Steindl, [1952] 1976, p. 45). Thus, technical change is an important source
of the cost differences that lie at the heart of Steindls analysis.
Steindl also argues that the adoption of new technology by progressive
firms enhances internal accumulation and expansion of capacity through
reducing costs and raising profit margins. There is a positive feedback from
internal accumulation and capacity expansion to further technical change.
Thus, technical change is identified by Steindl as a factor that can generate
a dynamic process of new profit opportunities and increased internal accu-

Economies of scale are a source of cost advantage for larger firms when firms differ in size
and when the economies are internal to the individual firm rather than realized by the entire
industry.

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mulation in the industry, which eventually pushes capacity growth ahead of

growth in market demand (Steindl, [1952] 1976, p. 51).
Summarizing, technical change is clearly important in Steindls analysis. It
can generate cost differences across firms and it also raises profit margins,
at least for progressive firms that adopt new technology. Further, it provides
for a continuing increase in profit margins that drives steadily increasing
internal accumulation by the progressive firms. This ensures tendencies
towards the emergence of excess capacity and continuation of the competitive struggle, which constitute the fundamental equilibrating forces in
Steindls ideal pattern of competition, at least until the ultimate phase of
maturity with oligopoly.

3. EXTENSIONS

In focusing on the instrumental role of technical change, Steindl leaves

underdeveloped the exact nature of technology and the process by which it
changes over time. In the present paper, three specific characterizations of
technology are introduced with the objective of further integrating technical
change into the analysis of imperfect competition. In a commentary on
the links between technical progress and evolution, Steindl ([1980], 1990)
recognizes each of these characterizations. However, he does not address
the possible divergent implications of the various characterizations for his
earlier research. Here, we take up that challenge and examine the
implications of each characterization of technology for the pattern of
competition, utilizing Steindls own approach to the analysis of imperfect
competition.

3.1

Capital-embodied technical change

Technical change may take the form of an innovation available to all firms
in an industry, generally as a result of technical activity outside the industry,
especially by equipment-supplying firms. Adoption of such an innovation
generally will require some investment in new equipment by firms. We emphasize this investment linkage by focussing on capital-embodied technical
change as an example of innovation available to all firms in an industry. A
common variant is the vintage-capital model, in which improvements in technology can only be accessed through acquisition of new equipment. Once
equipment is purchased, its technology and productivity is fixed for the duration of its useful life. The rate of technical change is therefore directly linked

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to investment activity and, in the context of Steindls analysis, to the process

of internal accumulation.
The investment-driven nature of technical change when technology is
embodied in capital, especially as in the vintage-capital model, fits well with
at least some aspects of Steindls own discussion. For example, in discussing
the relationship between investment and costs, Steindl assumes that it is only
when they install the additional capacity that cost reductions are achieved by
progressive firms (Steindl, [1952] 1976, p. 44). This assumption is satisfied
exactly in the vintage-capital model of technology.
Steindl also notes that internal accumulation by progressive firms increases
their cost advantage over marginal firms, thereby increasing their gross profit
margins and internal accumulation. However, he does not explicitly introduce a vintage-capital model and does not tie the rate of cost reduction
directly to internal accumulation. The question we consider here is to what
extent Steindls conclusions regarding the emergence of an ideal pattern of
competition are altered by explicit integration of a vintage-capital model with
his analysis of imperfect competition. To do this we adapt Salters (1966)
vintage-capital model, which excludes consideration of economies of scale,
even though such economies are clearly present in Steindls analysis. Our
purpose is examining whether the characterization of technical change represented in the vintage-capital model is likely to generate the ideal pattern
of competition.
Salter uses a vintage-capital model to examine the dynamics of cost and
price under the assumption of perfectly competitive markets. In his model,
the price of output is determined by the average cost of production using
new equipment, so that prices fall as technical change drives down the cost
of production with the latest vintage of equipment. Also, old equipment is
utilized only as long as the unit operating cost, excluding any cost of capital,
is less than or equal to average cost of new equipment, including the cost of
capital.
We replace the assumption of perfect competition in Salter with the
assumptions of Steindls analysis of imperfect competition. In particular,
rather than have price move with the average cost of production using new
equipment, we follow Steindl and assume that price remains rigid as long as
competitive pressure is low. This leads to a rising gross profit margin for those
firms that put new equipment into production, but not for firms using old
equipment. An operating cost advantage results, with firms using the oldest
equipment taking the role of Steindls marginal firms. Notably such firms can
continue to operate covering their operating costs, even when their unit operating costs exceed the average total cost of using new equipment. However,
their limited access to finance, as suggested by Steindl, combined with their

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lack of internal accumulation means they are prevented from lowering their
operating cost through the purchase of new equipment.
The cost advantage of the progressive firms leads to their relative growth.
Further, their cost advantage grows with the expansion of their capacity, furthering their rate of expansion. When this growth rate exceeds the growth of
industry demand, competitive pressure intensifies, moving first to the moderate competitive pressure associated with relative concentration and then to
the aggressive competitive pressure associated with absolute concentration.8
Finally, once the share of marginal firms is reduced sufficiently, the incentive
for further aggressive competition is removed, providing the conditions for
mature oligopoly.
The above discussion suggests a pattern of competition that aligns well
with Steindls ideal pattern. However, in identifying the group of progressive firms, Steindl argues that it is essential that not all firms are capable of
adopting the technical advances that lead to lower costs (Steindl, [1952] 1976,
p. 45). In the vintage-capital model, access to the methods of the progressive
firms requires only the purchase of new equipment. Thus, there is at least
one respect in which the adaptation of Salters vintage-capital model does
not fit with Steindls assumptions. This turns out to have serious implications
for the likelihood of an industry exhibiting the ideal pattern of competition
when technical change is accomplished by the purchase of new capital equipment, as in the vintage-capital model.
Marginal firms are not able to access the methods of progressive firms
through acquisition of new equipment due to their lack of internal accumulation. However, firms with costs between those of the marginal and progressive firms do have internal accumulation and are thus able to realize, at
least in part, the cost reduction associated with new equipment. Further,
entrants, who by their position are acquiring production capacity for the
first time, are in a particularly good position to challenge the dominance of
established progressive firms.9 This undermines the distinction between
8

This suggests a link between productivity and competition. In particular, firms whose operating costs are above the average total cost of new equipment can continue to operate only in
industries where competitive pressure is low enough to allow price to rise above the cost of new
equipment. Intensification of competitive pressure with the expansion of capacity by progressive firms leads to a rise in productivity. The expansion not only increases the share of output
coming from high productivity capacity during relative concentration, but marginal firms with
high operating costs and low productivity are eliminated from the industry during absolute
concentration.
9
Airlines seem to provide an example of an industry in which this possibility has been realized.
New entrants, such as Virgin Atlantic, have been able to undermine the cost advantage of the
established progressive firms, at least in part, by operating fleets consisting solely of new generation aircraft with lower operating costs per passenger seat mile.

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progressive firms and other firms that is central to the ideal pattern of competition. Any firm that acquires new equipment achieves the methods associated with the lowest operating costs and hence the highest possible gross
profit margin.
To summarize, industries characterized by capital-embodied technical
change, as assumed in vintage-capital models, are unlikely to exhibit Steindls
ideal pattern of competition. Absolute concentration is possible when some
progressive firms achieve an initial cost advantage, with the extra profits
achieved reinvested into expansion of productive capacity (Steindl, [1952]
1976, p. 45). However, internal accumulation by intramarginal firms or entry
of new producers can upset the pattern, for these firms can access the
methods of the progressive firms through the acquisition of new equipment.
This undermines the cost advantage of the progressive firms, so that their
profit rate and internal accumulation is no longer the only trigger for intensification of competition. The link between the expansion of demand and
the rate of profit that occurs in the ideal pattern of competition is broken.
Instead, the intensity of competition may increase and the rate of profit may
fall as a result of entry that is independent of the growth of demand, reflecting simply the migration of small producers between industries in search of
higher profit rates.10

3.2

Learning by doing

The ability of progressive firms to maintain a cost advantage over new

entrants is more secure in a characterization of technology where improvements occur through learning by doing. Steindl ([1980] 1990) recognizes
the role of learning by doing and discusses its impact on production costs in
terms of the progress function, where the direct labour cost of a unit
of output decreases with the cumulative level of output. He applies this
progress function only to the discussion of aggregate productivity growth, but

10

Steindl ([1952] 1976) stresses the role of economies of scale as well as technological innovation as a source of cost advantage. If there are substantial economies of scale, a new entrant
may operate at a cost disadvantage to progressive firms even when they can acquire capital
equipment that embodies best-practice technology. This is particularly true if the entrants have
limited access to finance, so that they would normally start operations at a small scale. However,
this implies that entry is difficult, and as Steindl notes in discussing the implications of difficult
entry for the pattern of competition, We conclude that in this case the working of competition
as previously discussed is considerably impaired (Steindl, [1952] 1976, p. 53). Thus, with
economies of scale, an industry where the assumptions of the vintage-capital apply is not likely
to fit Steindls ideal pattern of competition.

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the same concept may be applied at the level of the individual producer on the
assumption that the learning that occurs is specific to the particular firm.11
In this case of learning by doing, progressive firms may be early entrants
who have a higher cumulative output than later arrivals. Alternatively, they
may be firms that achieve a cost reduction through the adoption of new
methods more quickly than their competitors. In either event, a current cost
advantage translates into a higher rate of internal accumulation and faster
expansion of capacity under Steindls assumptions. This implies a faster rate
of increase in cumulative output, all other things constant, and, hence, a
faster rate of productivity growth and cost reduction. The cost advantage of
the progressive firms therefore grows continuously.
As in the case of the vintage-capital model discussed above, cost reductions occurring with internal accumulation when there is learning by doing
reinforce the cost advantage of progressive firms. This speeds the internal
accumulation by these firms, impelling them to intensify competition when
their internal accumulation exceeds the growth in market demand. This
enhances the move towards relative and absolute concentration in Steindls
ideal pattern of competition.12 However, unlike the case of the vintagecapital model, there is no prospect that the cost advantage of the progressive
firms is undermined by entry. Entrants start with no cumulative output and
hence should have relatively high costs.
Steindl recognizes that there are limits to the productivity increases and
cost reductions that can be achieved with learning by doing as expressed in
the progress function. In particular, he notes that the learning effect should
diminish as a firm continues production with the same product and same
equipment (Steindl, [1952] 1976, p. 86). With a rigid price, the gross profit
margin and amount of internal accumulation then tend to stabilize, relieving the potential that investment leads to accelerating growth of excess capacity. Even so, conditions of technology characterized as learning by doing
seem especially favourable to Steindls ideal pattern of competition.

11

This type of organizational learning or development of firm capabilities differs from the type
of learning by doing associated with on-the-job training. The latter type generates workerspecific skills or human capital that can be transferred between firms and, therefore, need not contribute to the type of sustainable cost differences that are achieved by Steindls progressive firms.
12
It is interesting that Steindl ([1980] 1990) cites the case of airframe manufacturer in explaining the phenomenon of learning by doing in terms of a progress function. Commercial jet aircraft manufacture has experienced a pattern of competition that seems to fit well with Steindls
ideal pattern. Boeing has built on its learning by doing to drive all domestic competition from
the US industry, with only the Airbus consortium continuing to provide competition in the world
market through consolidation of previously independent European producers into a single largescale enterprise.

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3.3

Harry Bloch
Innovation

Steindl points to innovation as something apart from learning by doing,

noting that the share of productivity growth in the growth of output is too
large to be explained by only learning by doing or scale effects (Steindl,
[1952] 1976, p. 88). Here, we further distinguish innovation as meaning a
change in technology that is available to only a single firm, at least in the first
instance. This is a highly restrictive interpretation of innovation. However, it
helps distinguish innovation as a category separate from the above characterizations of technology, where all firms potentially have equal access to the
benefits of technological change aside from the limitation of lack of access
to finance.
The absence of a clear link between investment in new equipment and technical change also helps distinguish the analysis of innovation from the analyses of the vintage-capital model or learning by doing. In the vintage-capital
model any firm that invests in new equipment obtains access to the bestpractice technology.13 In the learning-by-doing model the technology
achieved by a firm depends on its cumulative output, but is indirectly linked
to investment in equipment as expanded capacity leads to increased production, through growing demand or through aggressive competition.
The definition of innovation as a change in technology by a single firm fits
well with the most specific use of the terminology by Steindl in his analysis
of the pattern of competition. In particular, Steindl argues that technical
innovations both provide the funds for greater investment and sufficient, or
even increased, profitability for this investment (Steindl, [1952] 1976, p. 49).
Thus, innovation in the sense of a firm-specific advance in technology provides the differential advantage to the progressive firm, which propels
Steindls ideal pattern of competition.
By linking innovation to overcoming the barrier of imperfect competition,
Steindl clearly demonstrates an appreciation for the use of innovation as a
method of competition. He intimates that it is established firms who introduce innovations. However, as noted in section 1, Steindl ([1987] 1990) later
acknowledges that he neglected the possibility of innovation by new entrants,
particularly innovation in the form of the introduction of a new product.
Therefore, a full analysis of imperfect competition with innovation needs to
consider both process and product innovation, which can be introduced by
either established firms or new entrants.
13

Of course, the existence of improved equipment is made possible by technology development

in the industry supplying capital goods. In this sense there is a notion of innovation latent in
the vintage-capital model.

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The implications of innovation for the pattern of competition are perhaps

the clearest when established firms introduce process innovations. Here, the
expectation is that it is among the progressive firms that innovation is the
most likely. They have the greatest access to finance to undertake research
and development activities with uncertain payoffs. Further, as noted by
Steindl, innovation provides a mechanism for overcoming the barrier of
imperfect competition posed by the existence of other firms who are earning
greater than normal profits. Only with a substantial cost advantage does it
become feasible for the progressive firms to mount the aggressive competition necessary to acquire market share from formidable competitors.
When progressive firms introduce process innovation resulting in reduction in their production cost, they enhance their competitive advantage. This
has an impact similar to that found in the analysis of technical change due
to learning by doing within the firm. Indeed, process innovations by progressive firms may be difficult to distinguish from learning by doing. Applying the analysis of imperfect competition under learning by doing from the
subsection above, the implication is that process innovation by progressive
firms can be expected to result in Steindls ideal pattern of competition.
What about product innovations by progressive firms? While such innovations reinforce the advantage of the progressive firms, they also have the
potential to substantially affect the rate of growth of demand, particularly
if the innovation leads to a substantially new product or a new use for an
established product. This can undermine the limit placed on firm profit
margins and internal accumulation by the normal growth of industry
demand that features prominently in Steindls ideal pattern of competition.
A further implication of product development is that it can disrupt the stability of the oligopoly structure in the mature phase of the ideal pattern. In
discussing the implications of product development for Steindls analysis,
Shapiro (1988) argues that established products can be displaced by new
products and large firms can lose out to small.14 Elsewhere, she goes further
and suggests that maturity is not an enduring state due to the possibilities
for new products and new firms (Shapiro, 1986).
As noted above, Steindl came to recognize the disruptive influence of innovation by entrants on the pattern of competition. In particular, he admits in
a late paper that his theory was probably not sufficiently dynamic (Steindl
[1987] 1990). It need only be added that either process or product innovation
can provide the basis for successful entry into an industry, even where profit
14

Shapiro purposefully uses the Schumpeterian phrase, creatively destroyed, in this argument.
The relationship between Schumpeters analysis of dynamic competition and that of Steindl is
examined in Bloch (2000b).

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margins are not particularly high. Here, innovation offers the entrant the
potential for overcoming the barrier of imperfect competition.15

4. CONCLUSIONS

We find that introducing specific assumptions concerning the characterization of technical change into Steindls analysis of imperfect competition
reveals substantial differences in the implications for the pattern of competition. In particular, when technical change is characterized as learning by
doing, utilizing Steindls assumptions about imperfect competition yields a
pattern with rapid growth of progressive firms, leading to aggressive competition by these firms with the relative and absolute concentration of industry, and finally, to maturity with oligopoly. A similar pattern emerges when
technical change takes the form of process innovations by progressive firms.
The pattern of competition resulting from the analysis with either of these
characterizations fits that discussed by Steindl as his ideal pattern of
competition.
Other characterizations of technical change that are examined above
are not so favourable to the establishment and maintenance of Steindls
ideal pattern. When technology is embodied in capital equipment, as in the
vintage-capital model, other firms that purchase new equipment have access
to the same technology as progressive firms. This destroys the cost advantage
of the progressive firms, potentially leading to aggressive competition that is
independent of the amount of internal accumulation by the progressive
firms, thereby breaking the relation in Steindls ideal pattern between profit
margins of the progressive firms and the growth of market demand. Similar
results emerge when technical change occurs by way of process innovations
introduced by new entrants.
Technical advance in the form of new product development can also lead
to a pattern of competition that diverges from Steindls ideal. In particular,
product development by progressive firms that impacts on product demand
upsets the relation between profit margins and the normal growth of market
demand. In extreme cases, new products become the basis of new industries
or the competition with firms in other industries. Finally, product innovation

15

An example of the use of innovation by an entrant coming into a low-profit industry is given
in the US steel industry. Nucor, a company producing steel from mini mills, used the adoption
of a thin-slab casting technology to successfully enter the market for flat-rolled steel sheet
in competition with companies such as US Steel (see Ghemawat, 1997, ch. 6, for a detailed
discussion).

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301

by new entrants upsets the oligopolistic stability that Steindl argues represents maturity in the ideal pattern of competition.
In closing, it should be noted that the results regarding the pattern of competition that emerges under each of the characterizations of technical change
examined in this paper are based on exclusion of consideration of the role
of economies of scale, which are central to Steindls own analysis. Otherwise,
we adopt the assumptions and approach of Steindls analysis of imperfect
competition. What is argued is that Steindls own conclusions regarding the
emergence of an ideal pattern of competition are supported only with some
characterizations of technical change, namely those in which technological
advance occurs through learning by doing within the firm or through process
innovation by progressive firms. For the other characterizations of technical
change, Steindls analysis of imperfect competition is still relevant, just not
wholly determinant of the pattern of competition that is likely to occur in
the industry.
Contrary to rejecting Steindls analysis, what is suggested is the need for
its further development. We have considered three specific characterizations
of technical change, each of which is possible a priori. There remains a need
to consider other possible characterizations of technology, to explore the
impact of combining different characterizations, and, perhaps most importantly, to consider the possibility that the pattern of competition impacts on
the character of technology that develops in a particular industry. Thus, we
have provided an introduction to a research agenda for modelling a process
of cumulative causation, which involves technical change, accumulation and
market structure along Steindls lines.

REFERENCES
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Economic Papers, 39, pp. 92107.
Bloch, H. (2000b): Schumpeter and Steindl on the dynamics of competition, Journal of Evolutionary Economics, 10, pp. 34353.
Chamberlin, E. H. (1933): The Theory of Monopolistic Competition, Harvard University Press,
Cambridge, MA.
Ghemawat, P. (1997): Games Businesses Play: Cases and Models, MIT Press, Cambridge, MA.
Kalecki, M. (1937): The principle of increasing risk, Economica, 3, pp. 4407.
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German edition by Redvers Opie), Oxford University Press, London.

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Shapiro, N. (1986): Innovation, new industries and new firms, Eastern Economic Journal, 12,
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Steindl, J. ([1987] 1990): Kaleckis theory of pricing: notes on the margin, in Fink, G., Poll, G.,
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Harry Bloch
School of Economics and Finance
Curtin University of Technology
GPO Box U 1987
Perth, WA 6845
Australia
E-mail: Harry.Bloch@cbs.curtin.edu.au

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