Chicago School of Thought

and
Mathematical School of Thought
 Evolution of Mathematical School

01 02 03 04

Earliest Marginalist Dip in Neoclassical Second

Proponents Revolution Thought Uprising
Before 1870 After 1870 1920s 1925-35
Mathematics brought rigor to economics.
Unfortunately it also brought mortis

-Kenneth Boulding
Earliest Proponents
• Ceva, Beccaria, Canard and Whewell all noticed that prices were expressed as ratios
but were unable to conceptualize if the ratios were determinate or whether they had any
mathematical integrity

• Mathematical writers prior to the neoclassicals looked at physics of motions also called
“rational mechanics” in search of analogies in order to conceptualize value. All these
writers were linked by the fact of failure of analogy between price system and rational
mechanics. That is the numerical character of prices was not sufficient to apply
mathematics to economic analysis.
Beginning of Marginalist Revolution
• After around 1870,the analogical barrier was breached by the influx of scientists and
physicians in the field of political economy. Also it was only in 17th century that calculus
was invented

• This was when William Stanley Jevons, Léon Walras, Francis Ysidro Edgeworth, Irving
Fisher, Vilfredo Pareto, and many others entered the scene.

• They were influenced by a single mathematical metaphor given by equilibrium in a field

of force. That is equating potential energy with utility

• The rise of neoclassical economics, which is coextensive with mathematical economics,

is not because analogy was drawn from physical theory rather because major theorists
adopted similar mathematical metaphor
Marginalist Revolution: The First Uprising
● The Marginalist Revolution is usually
considered as a revolutionary event,
since it established a subjective utility
theory of value and adopted the
marginal approach as an effective
analytical tool for economics.
● The Marginalist Revolution marked
the rise of the Marginal Utility School
in the 1870s and probably that was
the start of modern neoclassical
economics.
● The subject matter which was
production, wealth and its distribution,
division of labor, accumulation and
growth in classical political economy ,
changed to individual choice and
maximizing behavior in the neoclassical
times.
● Walras, Jevons and Menger were
described as “first-generation
marginalists”.
The detachment of economics from political,
historical, moral, institutional and social
concerns restricted the scope of economic
subject and economics turned into a science
which examined the relationship between
given ends and scarce means.
Another important change was the treatment
of value as the main determinant of value
became “utility” contrary to “labor” in the
classical period. In the classical paradigm,
value was analyzed within the framework of
production, whereas neo-classicals treated it
as the customer’s desires.
This shift also established the use of
formal methods -mathematics in
particular- as the only way of analyzing
economic problems scientifically and
economists began to apply the methods
of natural sciences in economics by
emulating the success of natural sciences
in the nineteenth century.
With the transition from classical political
economics to neoclassical economics,
there occurred a shift in economic
thought from the approach that the
economy was an inherent part to society
to the view that economy was analyzed
independently from social context.
Neoclassical Economics and Mathematics
Early attempts at empirical work were the
exception, not the rule. In the late
seventeenth century most classical Neoclassical economists followed
economists followed the common-sense many different approaches to statistical
empiricism approach. They posited their laws analysis. Stanley Jevons saw statistics
about how the economy worked and as a method of making economics into
supported those laws with examples. an exact science. Léon Walras, on the
other hand, had little place for
With the beginning of neoclassical
empirical work; he continued to
economics in the late 1800s, approach of
develop his theory independent of any
having no tested theory was called into
empirically testing. Alfred Marshall
question, as there was formalization of
believed in empirical work but did not
economics going on. Hence the approach
conduct formal statistical analysis.
that was most discussed was statistical
analysis, which itself was undergoing a
revolution.
 Cournot was the first economist who, with competent knowledge of
both subjects, endeavored to apply mathematics to the treatment of
economics. His main work in economics is Recherches sur les
Antoine-Augustin principles mathématiques de la théorie des richesses (1838;
Cournot Researches into the Mathematical Principles of the Theory of
Wealth).
His primary concern was the analysis of partial market equilibrium,
which he based on the assumption that participants in the process
of exchange are either producers or merchants whose goal is the
maximization of profit.
His most important contributions were his discussions of
supply-and-demand functions and of the establishment of
equilibrium under conditions of monopoly, duopoly, and perfect
competition; his analysis of the shifting of taxes, which he treated
as changes in the cost of production.
The Cournot Duopoly model developed in his book also introduced
the concept of Nash Equilibrium (pure strategy), the Reaction
Function and best-response dynamics.
 Edgeworth was an Irish economist and statistician who innovatively
applied mathematics to the fields of economics and statistics. His
most famous work, Mathematical Psychics (1881), presented his
Francis Ysidro new ideas on the generalized utility function, the indifference curve,
Edgeworth and the contract curve, all of which have become standard devices
of economic theory.
Edgeworth contributed to the pure theory of international trade and
to taxation and monopoly theory. He also made important
contributions to the theory of index numbers and to statistical theory,
in particular to probability, advocating the use of data from past
experience as the basis for estimating future probabilities.
In economics, Edgeworth box is a two-dimensional graphical
representation of a simple, closed economy consisting of two
individuals and two items (or resources) that are finite in supply. The
dimensions of the box are the total quantities of the two goods. The
individuals’ preferences over the items are represented through
indifference curves. The advantage of depicting an economy in this
way is to allow comparisons of different allocations and to determine
their relative efficiency.
 Walras was a French-born economist whose work Éléments d’
économie politique pure (1874–77; Elements of Pure Economics)
was one of the first comprehensive mathematical analyses of
general economic equilibrium. Walras formulated the marginal theory
Léon Walras of value and pioneered the development of general equilibrium
theory.
General equilibrium theory attempts to explain the behavior of
supply, demand, and prices in a whole economy with several
interacting markets, by seeking to prove that the interaction of
demand and supply will result in an overall general equilibrium. The
theory both studies economies using the model of equilibrium pricing
and seeks to determine in which circumstances the assumptions of
general equilibrium will hold.
William Stanley Jevons
He was an English logician and economist whose book The
Theory of Political Economy (1871) expounded the “final”
marginal utility theory of value. Jevons contributed to the
marginal utility theory in the form of terminal utility and final
degree of utility.

He was an Austrian economist who contributed to the development of Carl Menger

the marginal utility theory and to the formulation of a subjective theory
of value. Menger elaborated on the importance of satisfactions and
dependent utility in the theory.
Jevons, Menger and Walras were the pillars of marginalist revolution
and they explicitly introduced the law of marginal utility, explained that
marginal utility determined value, and presented other related
implications and applications to economics, challenging the dominance
of the classical political economy at the time.
After the revolution
By 1920s there was a dip in the evolution of Mathematical School. Because of following reasons:

There was widespread resistance towards neoclassical

1. tenet of social mechanics which was associated with
mathematical economics.

2. Economics was becoming increasingly professionalized, so

the students did not have the same access to physics and
mathematics the way their professors and original
marginalists had., and hence this next generation was not
enthusiastically inclined towards mathematics

3. The early marginalists received heavy criticism from

physicists and mathematicians like Vito Volterra, Joseph
Bertrand, Paul Painlevé and Henri Laurent for their
incorrect and inappropriate uses of the physical metaphor.
 Hence the marginalists revolution and rise of neoclassical
economics played a important role when it came to establishing
mathematical discourse in economics.

Additionally earlier claims to have attained definitive

scientific status simply by means of mathematical
expression had grown vulnerable and hard to justify.
Dip in Neoclassical School of Thought
● By the 1920s, the neoclassical ●
research program was in trouble in
most academic contexts.
● The internal consistency of the
● Few economists considered the
concept of utility credible; many
mocked it openly, like the partisans of
the American Institutionalist school. It
had never gained much of a foothold
in France to start with.
Marshallian Cambridge was the only
strong foothold.
Marshallian program of supply and
demand schedules then came under
attack by J. H. Clapham, Piero Sraffa
and others. After 1917, Marxism
loomed on the horizon as something
more than an irrelevant fringe
doctrine.
The Second Uprising
● Second leap in the growth of
Mathematical School of Thought took
place in between 1925-35,with Quarterly
Journal of Economics leading the way
and Journal of Political Economy
following the suit. ● This time there was more
● This sudden uprising was not because of formalization of discrete models and
sophistication of mathematics or cautious accommodation of stochastic
economics, rather it was simply mirroring mathematics, so much that each
the neoclassical school of thought growth neoclassical article was more likely to
trajectory. have a primarily mathematical
orientation.
● Then came a wave of trained ● They discovered that it consisted
scientists and engineers into largely of the formal models which they
economics including Ragnar Frisch, had already mastered in their earlier
Tjalling Koopmans, Jan Tinbergen, training in physics so they could jump
Maurice Allais, Kenneth Arrow and a right in and apply more up-to-date
host of others. mathematical techniques and
metaphors to the neoclassical program
● For the first time, noted and come up with far-reaching results.
mathematicians such as John von
Neumann, Griffith Evans, Harold ● And hence after 1930s if mathematics
Thayer Davis, Edwin Bidwell Wilson were a language, neoclassical
and others were induced to turn their economics at that time was a local
attention, however briefly, to dialect.
economics.
Ragnar Frisch
He was a Norwegian Economist who received the Nobel Prize for
Economics in 1969 for having developed and applied dynamic
models for the analysis of economic processes.Frisch invented
the word “econometrics” to refer to the use of mathematical and
statistical techniques to test economic hypotheses.

Tjalling Koopmans

He was a Dutch-born American economist who shared the Nobel

Prize with Leonid Kantorovich in 1975. The two men
independently developed a rational method, called activity
analysis, for allocating resources so as to attain a given economic
objective at the lowest cost.
John Von Neumann
He was a Hungarian-born American mathematician who was a
pioneer of the application of operator theory to quantum
mechanics in the development of functional analysis, and a key
figure in the development of game theory, the universal
constructor and the digital computer.

Edwin Bidwell Wilson

He was an American mathematician who majorly worked in the

field of Aeronautics, later on shifting his focus to statistics and
probability and was the one who introduced confidence intervals.
 Why did I leave physics at the end of 1933? In the depth of the worldwide economic
depression, I felt that the physical sciences were far ahead of the social and economic
sciences. What had held me back was the completely different, mostly verbal, and to me
almost indigestible style of writing in the social sciences. Then I learned from a friend that
there was a field called mathematical economics, and that Jan Tinbergen, a former student of
Paul Ehrenfest, had left physics to devote himself to economics. Tinbergen received me
cordially and guided me into the field in his own inimitable way. I moved to Amsterdam, which
had a faculty of economics. The transition was not easy. I found that I benefited more from
sitting in and listening to discussions of problems of economic policy than from reading the
tomes. Also, because of my reading block, I chose problems that, by their nature, or because
of the mathematical tools required, have similarity with physics

- Tjalling Koopmans
Plurality and Mathematics
● There was no one way that mathematics ● Rather as Debrue put it “ The fact
was introduced in economics. The hunch that commodity space has the
existed long back but was later structure of a real vector space is a
conceptualised as the societies evolved basic reason for the success of the
and became more organised and required mathematicization of economic
extensive objectivity. theory”
● The fact that price and quantity are
expressed as numbers in the quotidian
operation of markets was not sufficient to
persuade generations of economists that
mathematical discourse would be
regarded as uniquely correct or
appropriate in discussions of the
economy.
● As illustrated by historian Witold
Kula that standardized commodity
measurements are a relatively
recent phenomenon, becoming
instituted long after market relations
were prevalent. In earlier times
many commodity metrics were
gauged by arbitrary anthropometric
units, such as butter by the "round,"
wool by the "fleece," honey by the
"hand," land by the amount that
could be plowed in a single day, and
so on.
● By and large, measures did not
exhibit the invariance required to
constitute algebra as we know it.
● Prices in modern markets obviously
conform to specific algebraic
structures, but they are not the a
priori products of nature or of the
individual mind
Hence, the reason that algebra (and probably abstract algebra) are necessary
to describe modern market activity is that market structures have historically
evolved to the point impersonal character of appropriation. This has no
relation with "equilibrium" or any other metaphor borrowed from physics.
History and mathematics, so often regarded as polar opposites in economics,
are united in a single narrative. Mathematical school of thought as we see
both expresses and enforces the way our culture has decided to organize and
exchange in the economy.
Techniques Used

01 02
Differential and Mathematical
Integral Calculus programming

03 04
Matrix Algebra Game Theory

05
Agent Based computational
economics
 How much Mathematics is too
much Mathematics?
Mathematics is a branch of logic and helps to prove the propositions or statements with
data.
Yet, because economics operate in a setting which is ever changing proving becomes
difficult, and hence excessive assumptions are put in place to remove the variability, to be
able to prove a model.
But when variability is removed the subject can no more give us real life solutions. That is
why we end up black swans like 2007-08 crisis, because everything is thought to be working
under a mathematical model and not according to human behavior.
The understanding of economics is possible only by history and its mistakes, because all is
not known of economics even till date owing to the fact that Economics is a natural science
and not a hard science.
When mathematics take the lead, the diversity of economics gets lost, because context
is more important in economics than proving a certain situation and fitting in in one
mathematical model.
Hence, mathematics should be a tool, not the starting point.

That task, today and always, belongs to deductive logic and verbal exposition.
Economics is a science based on human action; and hence "aggregates" do not act,
only individuals do. And hence economics is not going from particular to general, rather it
is made and shaped by social structures and hence should be deduced without a
presumption that one technique will work in some other situation.
Chicago School of
Thought
The Chicago School of Thought has always held a distinct and influential place in
economics through the various phases - First School, Second School and Third
School. The Chicago School of Economics is a neoclassical economic school of
thought which was originally developed by members of the department of
economics at the University of Chicago in the 1930’s.
It asserts that free markets best allocate resources in an economy and that
minimal or no government intervention is best for economic prosperity. The
Chicago School includes monetarist beliefs about the economy, implying that the
money supply should be kept in equilibrium with the demand for money. At an
individual level, it assumes that every actor in the economy is rational i.e they
maximize their self interests and respond to price incentives accordingly. Looking
at the entire society, free markets along with rational actors will ensure allocative
efficiency in the economy.
Friedman’s quantity theory of money was derived from the rationality assumption.
It states that money supply and price level in an economy are directly proportional
which leads to economic growth when rational actors make allocative decisions.
Frank Hyneman Knight is considered as the founder while Milton Friedman,
Merton H. Miller, Richard Posner, Garry S. Becker and George Stigler are the
major contributors to this school of thought.
First Chicago School
• The first school of thought began in the 1920’s with the work of
Frank H. Knight and Jacob Viner.
• They did not support positivistic economic methodology and
denounced economic imperialism on the grounds that
economic analysis should be more confined.
• Being suspicious about the efficiency claims of laissez-faire
economics, they argued for it only on a "non-consequential"
basis. They welcomed active government policies to cure
recessions (Viner's recommendations on "re-inflating" the
economy and supported counter-cyclical monetary policies
(Chicago Plan by Simons).
• They were hostile to "alternative" economic paradigms. Hence,
they did not welcome the Keynesian Revolution in
macroeconomics and denounced the Monopolistic Competition
approach in microeconomic theory. They believed that the
issues which these paradigms aimed to solve could be
resolved within the confines of Neoclassical Theory.
 Frank H. Knight

• Viner's criticism of Keynes made him famous and

laid the foundation for the Chicago School's
resistance to Keynesian Economics. Viner is
known for his belief, contrary to the analyses of
Keynes, that it is the long-term that really matters.

• Soon after, Viner left for Princeton while Knight

went into semi retirement. During this time,
Walrasian Economics (founded by French Jacob Viner
economist Leon Walras) emerged under the
Cowles Commision and lasted till 1955.
• The General Equilibrium Theory was in contrast to
the Marshallian Partial Equilibrium Theory and it
showed how demand and supply interact and tend
towards an equilibrium in an economy with multiple
markets functioning together.
 Second Chicago School
● In the 1960s, the department began to take a
new shape, led by Milton Friedman and
George J. Stigler. They are the core of what
became to be known as the "Second" Chicago
School, which is perhaps the most famous and
polemical one. Stigler and Friedman were
asserted Marshallians, and abstained from
using the methodology of the Walrasians of the
Cowles Commission.
● The Stigler-Friedman period was characterized
by faithful adherence to Neoclassical
economics and maintained itself dead against
the concept of market failures, reinforcing the
Chicago School stance against imperfect
competition and Keynesian economics.
• In microeconomics, led by George Stigler, the guiding maxim in the Chicago
approach was to preserve the Neoclassical paradigm whenever possible. When there
is no obvious solution to a particular problem, the recommended course was to
extend the Neoclassical paradigm by incorporating new concepts into it that would
make the subject matter amenable to economic analysis. For example: search theory
(George Stigler), human capital theory (Gary Becker and T.W. Schultz) and property
rights/transaction cost theory (Ronald H. Coase).

• The Chicago Law School used economics to rethink swathes of legal theory.
Moreover, sociological issues like addiction, family and even marriage were given a
thoroughly economic interpretation in the hands of Gary S. Becker and Jacob Mincer.

• In macroeconomics, the most renowned phase of the Chicago School was that of
"Monetarism" under the leadership of Milton Friedman, its best-known advocate.
 Milton Friedman
● For the longest time, Chicago was the only school
in America not swept by the Keynesian Revolution
but in Friedman's Monetarism, it found a
theoretical and empirical means by which to begin
rolling back the Keynesian revolution. Friedman
claimed that tenets of monetarism can also be
found in Henry Simons’s work during the early
school years.
George J. Stigler
● Monetarism has since given way to the more
mathematically rigorous "New Classical"
economics of Robert E. Lucas in the 1970s and
1980s.
Third Chicago School
● The third generation of Chicagoans
was represented by Gary Becker and
Sherwin Rosen. They extended the
influence of the Chicago School of
Thought into labour markets and
factors concerning an individual’s
everyday life.
● Beginning in 1957, with a landmark
study of the economics of racial
discrimination, Becker pursued the
logic of choice into many non-market
areas: the study of schooling - human
capital, marriage, family, religion and
crime and punishment.
● Becker’s colleagues Heckman and Robert
Fogel plunged deeper into cognitive
psychology, physiology and medicine,
building out Chicago’s well-established
taste for empiricism.
● In June 2011, the Becker Friedman
Institute for Research in Economics was
established at the University of Chicago in
honor of Gary Becker and Milton
Friedman.
Gary Becker

Shervin Rosen
Ideas and Methodology
Ideas
01 02
The school closely follows neoclassical
Markets allocate Monopolies are
price theory (as developed by Alfred
resources more created by
Marshall) and libertarianism. It rejected
efficiently than any government's
Keynesianism in favor of Friedman's
government attempt to regulate
monetarism, and later (after 1980) in favor
an economy
of rational expectations as developed by
Robert Lucas.
03 04
It rejects most government regulation of Governments should Instead, they should
business in favor of laissez-faire, regarding avoid trying to focus on maintaining a
the market economy as a necessary (albeit manage aggregate steady and low rate of
not sufficient) condition for a free society. demand growth of money supply
Methodology
In terms of methodology three
major areas can be identified in the
school’s arsenal.
Statistics - As the ideological
emphasis on "positive economics"
grew stronger over time,
empirically based research began
to rely more heavily on statistics,
putting less emphasis on theory
and more on evidence. As a result,
rather than in-depth research, the
school has always been known for
its broad range of subjects, ranging
from law to marriage, slavery, and
demography.
Analysis - This method became a near hallmark of the
Chicago school. It has always relied extraordinarily on
mathematical models through which, as some of its
critics charge, the scholar can prove anything he or she
wants to.
For example, such absurdities as criminal activity is a
career choice, and that smoking is an example of
making an informed choice (between cancer risk and
immediate gratification) can be derived from this
methodology.
Group discussions - The third major methodological
innovation that set the school apart from the other
existing economics departments was that their scholars
met together in frequent intense discussions that
helped set a group outlook on economic issues, based
on price theory.
Principle  
The Chicago school’s approach to antitrust law in the area of regulatory policy provides an
excellent demonstration of its general principles.

• The traditional approach to antitrust regulatory policy is to limit concentrations of

market power, such as by breaking up a firm that has become a monopoly.
• It argues that consumers are best protected by competition, even if it is only between a
few large firms in an industry.
• Even if a firm gains monopoly power, the Chicago school prefers to allow the market to
correct the problem rather than to rely on government intervention.
The Chicago school’s principles have been applied to a wide variety of areas, including
both market- and nonmarket-based activities.
Application of the Principle
1.
Becker applied the assumption that people make rational self-interested economic
choices to help explain aspects of human behaviour not traditionally studied by
economics, including crime, racial discrimination, marriage, and family life. In the realm
of law and economics, the Chicago school argued that legal rules and court decisions
should be aimed at promoting efficiency. The role of the law is simply to alter the
incentives of individuals and organizations to achieve that end.

2. In the area of tort law, the goal should be not simply to

minimize the cost of accidents but also to minimize the cost
of preventing accidents. If liability rules require individuals
to take precautions against accidents that are more costly
than the accidents themselves, then the outcome is
allocatively inefficient.
Important Contribution

The Chicago School is also known for its contributions to finance

theory. Eugene Fama won the Nobel Memorial Prize in Economic
Sciences in 2013 for his work based on his well-known efficient
market hypothesis (EMH).
In the 1960s, Eugene Fama demonstrated that stock price
movements are impossible to predict in the short-term and that new
information affects prices almost immediately, which means that the
market is efficient. The impact of Eugene Fama's results has
extended beyond the field of research. His results influenced the
development of index funds.
Benefits to the world

• The Chicago school economists have

• Chicago economics analyzes the
responses of individuals, firms, and the
been doing empirical, real-world
public sector to costs, benefits, and
research, combining basic theory with
incentives.
data to address contemporary and
historical problems. • It pairs a fundamental appreciation for
the power of competitive forces with a
• They have been willing to tackle
healthy distrust of governmental
unpopular, controversial topics and to
intervention in markets.
consider any new idea about what
makes people act the way they do. • It places a high value on personal and
economic freedoms and this imperative
• They constantly redefine and expand
of placing the highest value “on
boundaries to include finance theory,
personal and economic freedoms,” is
the economics of information, rational
probably the ever-lasting legacy of the
expectations, and law and economics.
Chicago School of Economics.
Economic Imperialism
The school is known for applying economic analyses to problems normally restricted to
other disciples and is thus accused for its imperialist character.
Business and finance were given economic treatment by Chicago economists, who
developed Modern portfolio theory, listing John von Neumann, Oskar Morgenstern, and
Jacob Marschak’s arguments concerning expected utility and game theory, among his
theoretical roots.
Political science and institutional theory were brought into Neoclassical economics by
Chicago School economists, economic history was given a Neoclassical reading, while the
Chicago Law School (particularly Richard Posner) used economics to address legal
theory.
Even sociological issues like addiction, family, and marriage were given a thoroughly
economic interpretation in the hands of Gary Becker, another Nobel Prize winner.
 Criticisms
● The Chicago belief in free markets and
the absence of government regulation
influenced world bodies such as the
World Bank and IMF. Their free-market
stance has often been criticised.
● The school argued that consumers are
best protected by competition by few
large firms. However, it also believed
that if a firm gains monopoly power, the
market should itself solve the problem
and there should be no government
intervention. However, if that happens,
it might cause greater harm to
efficiency.
● The efficacy of Fama’s EMH was also
debated after the subprime crisis.
Also, there have been many investors
who generate great returns on
investment and modify the market.
However, according to EMH, that
would be impossible other than blind
luck (which is not true).
● Behavioral economics scholars
challenge the assumption of Chicago
thought that humans are rational
self-interest maximizers. This is
because decision biases prevent
people from being the ideal decision
makers.
• Also, Chicago school’s goal of efficiency can be achieved only at the cost of justice and
equality in society.

• The Chicago School of economics was followed before the Great Recession. Most
important question was that if markets behaved efficiently, then there shouldn’t have
been any major imbalances or crisis. During the conflagration of the financial crisis,
there were questions about why people in top positions did not adequately regulate the
banking sector.

• Another point of Chicago thought criticised was that price discrimination is socially
beneficial because it moves the monopolist's output closer to the competitive level
which reduces the effects of monopoly.

• Economists today are rethinking the old antitrust theory of conglomerate forbearance.
This theory maintains that when conglomerates face other conglomerate firms in a
large number of markets, the conglomerates will compete less aggressively than
single-product firms selling in the same markets. Initially, the Chicago School rejected
all anticompetitive explanations for conglomerate mergers.
● The Chicago view is that charging prices
● The Chicago School influence also
below cost is irrational, because a
led to a more permissive approach to
predator cannot reasonably expect to
mergers. It has been proved by
recoup its initial losses from price
post-Chicago economists that cartels
predation. However, post Chicago analysis
can be stable, entry barriers can
show that predatory pricing can be a
slows entry in uncompetitive markets.
rational and successful business strategy.
Certain bundling strategies can also
● The new economics of price predation increase total profits by reducing
answers the recoupment problem. When a competition in the tied market.
firm predates against a few rivals, it can
● Several economists have shown that
create a reputation for irrationality. Other
profitable vertical integration can
rivals who have not experienced predatory
cause foreclosure and harm
competition will now reasonably fear that if
competition.
they compete strongly with the firm, it will
turn and predate against them. So they
back off. They cooperate with the predator
by charging a high price in their market.
The Chicago school of thought and the mathematical school of
thought both have stemmed from Neoclassical school of thought
but they have branched out in different directions.