437. Harrod to J. E. Meade , 6 March 1935 [a]

Christ Church, Oxford #

6 March 1935 [1]

Dear James

I have been thinking over Maurice Allen's criticism of my Duopoly note and I do not think it is sound. [2] My solution does include the postulate which I ought to have stated that neither supposes that if he alters output the other will alter (in the opposite direction) by as much. [3] And this is a justifiable postulate. For suppose the contrary. If each thinks that as he increases output the other will reduce by as much or more, he is thinking that by increasing output he can capture the whole market. But if each thinks this, each will expand up to market capacity. And thus each will prove wrong. Thus each cannot think this rightly. My analysis analyses what they have got to think about the reactions of each other if they think rightly.



It is true that if costs are zero (or constant) the particular demand curve will have a gradient equal to half that of the market demand curve. For unless the particular demand of B has infinite elasticity (which I have shown to be absurd) when A increases by 1 unit, B can restore the equality of marginal revenue to cost by decreasing by unit. \ when A increases by 1 unit, he is adding unit to the market supply.

  1. 1. This letter may be misdated. It refers, in fact, to an article on duopoly published in the Economic Journal in June 1934, and to a note by W. M. Allen commenting upon it (references are given in note 2 to this letter). The topic was discussed with J. A. La Nauze, a graduate student who attended Harrod's course on "Some questions of economic theory" where the argument on duopoly was expounded in Michaelmas 1933 (see note 1 to letter 348 ); Harrod's reply to La Nauze's criticism that Harrod did not refer to the marginal revenue of the second duopolist was dated 7 March 1934 (letter 348 ). In his note, Allen (who tutored La Nauze at Balliol) cited Harrod's article with the wrong title and date ("Note on Duopoly", March 1934); this suggests that Allen's note was written before publication. As it is unlikely that Harrod commented upon it a year after it was written, it is possible that this letter was actually written on 6 March 1934. Harrod's handwriting, however, is unambiguous.

    2. Harrod, "The Equilibrium of Duopoly", ( 1934:5 ). W. M. Allen, "Duopoly", TD with autograph corrections and additions, 11 pages, plus five pages of autograph additions and calculations, in HCN 9.5.1. Allen's note does not seem to have been published.

    3. In his note, Allen suggested that the entrepreneurs' policies are not independent but are influenced by forecasts of responsive movements of the other market, and examined the mutual reaction in terms of the entrepreneur's suppositions regarding their reciprocal elasticities. Harrod, on the contrary, had failed to take into account the second entrepreneur's response to the first entrepreneur's policy (for such a criticism see also R. F. Kahn, "The Problem of Duopoly", Economic Journal XLVII, March 1937, p. 3).

    1. a. ALS, two pages on one leaf, in MP 2/4(23); photocopy in HP (NC).

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