Vilfredo Pareto and Enrico Barone
Pareto (1848-1923), and Enrico Barone (1859-1924). It brings into focus the two economists’ definition of the sources of market
power, the kind of entry barriers the identified, and the role they attributed to potential competition. It shows that even if
Pareto and Barone did not provide original analytical contributions to the solution of the models of price determination in
imperfectly competitive markets, they should still have a place in the history of the theory of non-competitive markets for
their theoretical innovations concerning the causes of market power.
: market power, marginalism.
Address for correspondence:
University of Lecce, Dipartimento di Scienze Economiche e Matematico-Statistiche, Ecotekne, Via per Monteroni, 73100 Lecce
June, 2005. I
Any opinions expressed in the papers included into the Quaderni del Dipartimento di Scienze Economiche e Matematico-
Statistiche are those of the authors. Citation and use of these papers should consider their provisional character.
This paper analyses the notions of competition and monopoly power in the writings of two well-known
Italian marginalists: Vilfredo Pareto (1848-1923) and Enrico Barone (1859-1924). As everybody knows, Pareto’s
profound impact on economics is mainly due to the concepts of “Pareto optimality”, “cardinal utility”, “Pareto’s
Law” of income distribution, and in general to the refinements of Walras’ general equilibrium theory
independent discovery of the marginal productivity theory, and even more for getting the “socialist calculation”
the interweaving of their lives and work can be found in this passage in a letter from Pareto to Maffeo
Pantaleoni: “All the theories I have set out are only the germs of theories. Economists, like Barone, who possess
knowledge, culture and intelligence, should … develop these theories, and seek new truths” (Pareto 1960: 445).
Schumpeter reminds us that starting from the 1890s the economists belonging to the Italian Marginalist School
took Italy into a leading position
, so there are good reasons to think that their ideas played an important role
Historians of economics have indeed studied the history of the profit maximisation analytical models in
a non-competitive setting, starting from Cournot (1838). Nevertheless they have always neglected the analysis of
economists’ ideas on the causes of market power. I wish to demonstrate here that the history of the theory of
imperfectly competitive markets can be significantly modified if the reconstruction of the way in which the
economists of the past described the sources of market power is taken into consideration. From this point of
view, marginalists are very important because of the new kind of entry barriers they identified.
2. Vilfredo Pareto
prices in the maximization of profit: Pareto solves the profit maximisation analytical problem in a monopolistic
regime (following Cournot), and even takes up the treatment of duopoly, though we shall not be dealing with
those issues here. Nor shall we get involved in the large number of well-known observations by Pareto on the
inefficiencies of the monopolistic regime compared to the competitive one.
We shall deal here with his reflections on the causes of market power, that he traces in the Cours
essentially to the “difficulty, or … impossibility, that exists in transforming savings into certain kinds of capital”
(§ 138). He also considers that “capital whose quantity remains virtually constant in a closed market” (Cours §
Pareto was an engineer before succeeding Walras in Losanna (Kirman 1998).
See Dooley (1998).
Schumpeter (1954, ed. 1976: 855).
absolute. They will therefore be able to secure very considerable gains” (Cours § 543).
In the Manual of Political Economy (1906), he deals with the causes of market power listing the various
ways entrepreneurs may eliminate competitors: “with the assistance of the law, or because he alone possesses
certain goods, or because by intrigue, trickery, by his influence or his intelligence, he wards off his
competitors … Finally it must be noted that it often happens that a certain number of individuals join together
precisely so that they can dominate the market” (Pareto 1906, ch. 3, § 47, Engl. transl. 1971: 117).
It is worth noting a passage in the Cours where Pareto criticises the excess number of small firms in the
retail sector, an excess that “explains the easy success of the firms that start to compete with them, the big stores
and co-operative societies”(§ 923). Since the retail trade is a sector where “fixed costs are quite important, it
follows that the reduction of the coefficients of production depend above all on the increase of the sum of sales”
(§ 923). This is essentially a brief passing reference to the concept of increasing returns to scale. In the Manual, on
the other hand, he goes into the analysis of increasing returns to scale more deeply, given that it was by that
time a more widespread phenomenon: “Some have assumed that the greater their output the better off
enterprises would be, and this notion has given rise to a theory according to which competition must end up
with the establishment of a small number of large monopolies. The facts are not in accord with this theory”
(Pareto 1906, ch. 5, § 79, Engl. transl. 1971: 243). Pareto then develops a clear-cut theory on the existence of a
minimum efficient scale: “for each type of production, there is a certain size of enterprise which corresponds to
the minimum cost of production” (Pareto 1906, ch. 5, § 80, Engl. transl. 1971: p.234).
On collusions, Pareto in the Cours writes: “the desire to set up a monopoly is natural for all producers” (§
799), and explains that this is the reason they try to form combinations and trusts. He is in favour of the
spontaneous formation of combination, but is convinced that without the support of government (which he
decidedly opposes) these agreements cannot last (Cours §§ 905-911). He also looks favourably on consumer co-
operatives, which in his opinion “have introduced free competition where it existed only in imperfect form”
(Cours § 922). He is essentially expressing the idea that the market power that derives from combinations, trusts
and other forms of associations is always open to threat from potential competition. In the Manual, too, Pareto
comes back to the subject of trusts: “Modern syndicates have two principal goals: 1. to give enterprises the size
which corresponds to minimum costs of production … 2. To escape free competition, in whole or in part”
(Pareto 1906, ch. 9, § 10, Engl. transl. 1971: 339). Pareto’s line of thought is not crystal clear, but he would appear
to be in favour of the first of these aims, i.e. to the search for the minimum efficient scale. Whereas he holds the
pursuit of the second objective (to escape from competition) to be futile, unless the government intervenes to
help out the trusts, thereby harming the consumers (Pareto 1906, ch. 9, §§ 13-15).
3. Enrico Barone
In addition to the usual legal monopolies, it is worth remembering the cases of unique resource, which Barone
dealt with in relation to rent: “Ricardo’s theory on land … is applicable to all capital that cannot be reproduced”
(56). Writing after Pareto, Barone obviously dwells at length on the effects on social welfare of the various
market regimes, and explains the reasons why “monopoly represents a diminution of consumer rent, and a
destruction of wealth” (22).
However, the source of market power Barone mainly considers is the one coming from economies of scale.
Barone directly faces up to the question of increasing returns to scale in the following terms: “If the cost of the
unit of production indefinitely diminishes, to the extent that the quantity of the product increases, it would be
advantageous for the production of every good to be concentrated in just one firm” (11). He thus examines the
industries where the most efficient production is through a monopoly: “And this may happen whenever …
there exists … a kind of firm, that at the limit of decreasing costs, is of a size sufficient to saturate, at the cost of
production, the entire demand of the market” (191). In this case, he states, the surviving firm should not be
considered a truly monopolistic firm, also for its different effects on social welfare
. Moreover in his opinion its
, Barone sets out with similar clarity the
the quantity produced tends to be shared out between the producing firms at the minimum cost so that each of
them may produce the corresponding [quantity] at the limit of the diminishing costs” (15).
Again with clarity he describes the way the entry of new firms may drive the price down to the minimum
average cost: “competition … forces each firm to remain within the limits of the diminishing costs … making, for
the part that was produced at rising costs, a new firm intervene which does go beyond the limits of the
diminishing costs” (16). From this derives the consequence (one Barone brings out), that since the optimal
quantity offered by every firm, and hence its size, is given by the minimum efficient scale, it is precisely the
action of competition which determines the optimum number of firms in equilibrium.
Barone then goes on to denounce those cases where the firms are smaller than their minimum efficient
scale, and therefore are higher in number than the optimum number: “it happens that, … because competition
does not operate sufficiently, this maximum size of firms is not reached – and hence the number of these is not
reduced to that minimum – to which corresponds the lowest cost of production” (191). In this case Barone says
that it is more efficient for fewer firms to produce at less cost.
“These single or unique firms … do not represent … a destruction of wealth: the contrary may even be true”
“These unique firms, emerging from competition, must always be in fear of the potential competition, … of
The “curve [of total costs] is always rising; … if it was reduced to a diagram with the unit costs of production
on the y-axis, it would be diminishing until a certain point and then rising” (14).
chance to exploit further economies of scale, provides Barone with an argument in favour of the extension of
firms’ size. On this he examines the combinations, and vertical and horizontal integration. Combinations, based
only on agreements, Barone judges intrinsically unstable and subject to “a latent state of war even during a
peace” (212). The reasons for the other forms of collusion he traces to the search by firms for efficient size (216).
In addition, he carries out an analysis of the determination of the price in the case of large firms, reiterating that
their situation is quite different from that of the monopolist
brings out the fact that such a firm may be subject both to international competition and to competition from
other smaller firms that produce the same good, as well as in part to potential competition
. In his opinion the
could “re-awake the potential competition” (234)
I have said that the historical reconstruction of the sources of market power has been neglected. Actually,
as far as I know, the whole history of the theory of the sources of market power has not yet been written
sources of market power, but to begin to write the history itself of the ideas about those sources. And this is why
I thought it was useful to investigate the marginalist period, believing it to be an important phase in which new
causes of market power are identified, as well as new instruments to examine it with.
Pareto and Barone believed in the efficacy of the market, and they also believed that market structures
adjust very quickly to the most efficient configuration
. This vision also finds confirmation when Pareto and
economic thought the only sources of market power considered were natural (resulting from the presence of
scarce factors, like natural resources, location, talent), and legal (like patents, property rights, State privileges,
State licenses), the marginalists develop the idea that there are also entry barriers of a technological kind (in
particular scale economies and network economies), or strategic.
We should remember that in that period only those in possession of a government licence (legal monopoly), or
“As for the potential competition, to tell the truth it is lazy and active intermittently. The struggle to rush into
The analysis of the determination of the price in this market regime, as also the welfare consideration, are
For a recent history of the concept of barriers to entry see McAfee, Mialon, Williams (2004).
On the “coincidence between viewing competition as rivalry and opposing anti-trust law” see Di Lorenzo and
. We have seen in fact that he puts forward Cournot’s conclusion again, according to which
falling” (Marchionatti 2003: 50). This conclusion, as is well known, had been criticized by Marshall, who tried in
various ways to reconcile increasing returns with competitive equilibrium (Groenewegen 1999, Hart 2004). In his
History of Economic Analysis
, Schumpeter expresses astonishment for the fact that after Marshall, discussion on
this subject “took so long to burst into print” (Schumpeter 1954, ed. 1976: 1046). He asks himself how it was
possible that “results were established in and after 1930 that might easily have been established by 1890”
(Schumpeter 1954 ed. 1976: 1048). As we have seen, Barone’s work, which had very clearly identified the terms
of the problem of natural monopoly, fits comfortably within that period. We should note furthermore that
Barone considers also this type of monopoly to be continuously threatened by potential competition, despite the
presence of high fixed costs, a position later taken by Stigler (1968).
We have noted earlier that Pareto, and even more precisely Barone, had clearly discovered the fact that
the number of firms present in the market might not be a good indicator of the monopoly power in the industry
concerned. In the presence of scale economies, indeed, they believed that a low degree of concentration was a
sign of inefficiency and low-level competition, not vice-versa.
Moreover, Barone and Pareto should also be remembered for their development both of U-shaped
average cost curves, and of the idea of minimum efficient scale. In the history of the theory of non-competitive
markets, these are important concepts, especially for the structure-conduct-performance approach
, since they
idea of the minimum efficient scale, whereas Barone in 1908 explicitly describes a U-shaped graph, where the
average total cost is on the y-axis
. This fact is in contrast with Scherer’s statement that up until Fisher’s
marginal cost functions continued to be emphasized, and average costs neglected, by neo-classicists” (Scherer
2001: 900). Having illustrated the contributions of Pareto and Barone on these subjects, we believe that the
historical reconstructions should be modified, and that these economists should be recognized as important here
Referred to firms with large-scale economies, so that market demand can be satisfied at lowest cost by one
firm rather than two or more (Sharkey 1982).
On the various approaches to the industrial economics see inter alia Martin (1994: ch.I).
See the quotation in note 6.
Bain J. S. (1956), Barriers to New Competition. Cambridge MA: Harvard University Press.
Barone E. (1908) Principi di economia politica. Roma: Athenaeum, 1915.
Cournot A. A. (1838), Recherches sur les principes mathematiques de la theorie des richesses, Paris. English translation
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Fisher I. (1912), Elementary Principles of Economics. New York: Macmillan.
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Pareto V. (1896-97), Cours d’économie politique, Lausanne: Librairie de L’Université.
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