On the Nature of Equilibrium in Monopolistic Competition

Richard Lee Carson

doi:doi:10.11648/j.ijber.20190802.14

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On the Nature of Equilibrium in Monopolistic Competition

Richard Lee Carson

Published in International Journal of Business and Economics Research (Volume 8, Issue 2)

Received: 5 March 2019 Accepted: 26 April 2019 Published: 17 May 2019

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Abstract

This paper shows that product differentiation is compatible with perfect competition under free entry and exit and small firm size relative to size of market. Thus, monopolistic competition is a form of perfect competition. Although no product sold under monopolistic competition has a perfect substitute, each product has many close, albeit imperfect, substitutes, which have a cumulative effect on own-price elasticity of demand. With infinitely elastic demand, excess capacity and sub-optimal firm size disappear from monopolistic competition in equilibrium. The number of basic industrial structures is reduced to three—monopoly or single seller, oligopoly or competition among the few, and perfect competition or competition among the many. Perfect competition can be divided into perfect competition with homogeneous products and perfect competition with differentiated products. Advertising can pay off under the latter, since products have separate identities and price depends on quality, even though firms are price takers for any given quality. Under oligopoly, firms will behave like Chamberlin’s monopolistic competitors when certain conditions are met, but there is no guarantee that these conditions ever will prevail. Finally, I ask how small a firm’s share of industry output value must be if it is to be a de facto price taker.

Published in	International Journal of Business and Economics Research (Volume 8, Issue 2)
DOI	10.11648/j.ijber.20190802.14
Page(s)	65-68
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2019. Published by Science Publishing Group

Keywords

Monopolistic Competition, Perfect Competition, Product Differentiation

References

[1]	Basu, S. and J. F. Fernald (1997). “Returns to scale in U.S. production: estimates and implications,” Journal of Political Economy 105, 249-83.
[2]	Bertoletti, P. and F. Etro (2017). “Monopolistic competition when income matters,” Economic Journal 127, 1217-1243.
[3]	Burnside, C., M. Eichenbaum, and S. Rebelo (1995). “Capacity utilization and returns to scale,” NBER Macroeconomics Annual 10, 67-110.
[4]	Carson, R (2006). “On equilibrium in monopolistic competition,” Eastern Economic Journal 32, 421-435.
[5]	Chamberlin, E. The Theory of Monopolistic Competition, 8th ed. Cambridge, MA: Harvard University Press, 1965.
[6]	Chen, Xi, “Increasing returns to scale in U.S. manufacturing industries: evidence from direct and reverse regressions,” unpublished paper, STATEC, Luxembourg, March 6, 2015.
[7]	Fradera, I. (1986). “Perfect competition with product differentiation,” International Economic Review 27, 529-538.
[8]	Hart, O. (1979). “Monopolistic competition in a large economy with differentiated commodities,” Review of Economic Studies 46, 1-30.
[9]	Mansfield, E. and G. Yohe. Microeconomics: Theory/Applications, 11th ed. New York: Norton, 2004, 404-415.
[10]	Margolis, S. (1985). “The excess capacity controversy: a critique of recent criticism,” Economic Inquiry 23, 265-275.
[11]	Perloff, J. Microeconomics: Theory and Applications With Calculus, 4th ed. Boston: Pearson, 2017, 520-525; 530-531.
[12]	Roberts, J. and H. Sonnenschein (1977). “On the foundations of the theory of monopolistic competition,” Econometrica 45, 101-114.
[13]	Rosen, S. (1974). “Hedonic prices and implicit markets: product differentiation in pure competition, Journal of Political Economy 82, 34-55.
[14]	Thisse, J.-F. and P. Ushchev, “Monopolistic competition without apology,” ch. 5 of Corchon, L. C. and M. A. Marini, eds., Handbook of Game Theory and Industrial Organization, volume I, Northampton, Mass: Edward Elgar Publishing, 2018, 93-136.
[15]	Varian, H. Intermediate Microeconomics With Calculus, 1st. ed. New York: Norton, 2014, 496-504.

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Richard Lee Carson. (2019). On the Nature of Equilibrium in Monopolistic Competition. International Journal of Business and Economics Research, 8(2), 65-68. https://doi.org/10.11648/j.ijber.20190802.14

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Richard Lee Carson. On the Nature of Equilibrium in Monopolistic Competition. Int. J. Bus. Econ. Res. 2019, 8(2), 65-68. doi: 10.11648/j.ijber.20190802.14

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AMA Style

Richard Lee Carson. On the Nature of Equilibrium in Monopolistic Competition. Int J Bus Econ Res. 2019;8(2):65-68. doi: 10.11648/j.ijber.20190802.14

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@article{10.11648/j.ijber.20190802.14,
  author = {Richard Lee Carson},
  title = {On the Nature of Equilibrium in Monopolistic Competition},
  journal = {International Journal of Business and Economics Research},
  volume = {8},
  number = {2},
  pages = {65-68},
  doi = {10.11648/j.ijber.20190802.14},
  url = {https://doi.org/10.11648/j.ijber.20190802.14},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijber.20190802.14},
  abstract = {This paper shows that product differentiation is compatible with perfect competition under free entry and exit and small firm size relative to size of market. Thus, monopolistic competition is a form of perfect competition. Although no product sold under monopolistic competition has a perfect substitute, each product has many close, albeit imperfect, substitutes, which have a cumulative effect on own-price elasticity of demand. With infinitely elastic demand, excess capacity and sub-optimal firm size disappear from monopolistic competition in equilibrium. The number of basic industrial structures is reduced to three—monopoly or single seller, oligopoly or competition among the few, and perfect competition or competition among the many. Perfect competition can be divided into perfect competition with homogeneous products and perfect competition with differentiated products. Advertising can pay off under the latter, since products have separate identities and price depends on quality, even though firms are price takers for any given quality. Under oligopoly, firms will behave like Chamberlin’s monopolistic competitors when certain conditions are met, but there is no guarantee that these conditions ever will prevail. Finally, I ask how small a firm’s share of industry output value must be if it is to be a de facto price taker.},
 year = {2019}
}

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TY  - JOUR
T1  - On the Nature of Equilibrium in Monopolistic Competition
AU  - Richard Lee Carson
Y1  - 2019/05/17
PY  - 2019
N1  - https://doi.org/10.11648/j.ijber.20190802.14
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Author Information

Richard Lee Carson

Department of Economics, Carleton University, Ottawa, Canada

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Plain Text BibTeX RIS

APA Style

Richard Lee Carson. (2019). On the Nature of Equilibrium in Monopolistic Competition. International Journal of Business and Economics Research, 8(2), 65-68. https://doi.org/10.11648/j.ijber.20190802.14

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ACS Style

Richard Lee Carson. On the Nature of Equilibrium in Monopolistic Competition. Int. J. Bus. Econ. Res. 2019, 8(2), 65-68. doi: 10.11648/j.ijber.20190802.14

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AMA Style

Richard Lee Carson. On the Nature of Equilibrium in Monopolistic Competition. Int J Bus Econ Res. 2019;8(2):65-68. doi: 10.11648/j.ijber.20190802.14

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@article{10.11648/j.ijber.20190802.14,
  author = {Richard Lee Carson},
  title = {On the Nature of Equilibrium in Monopolistic Competition},
  journal = {International Journal of Business and Economics Research},
  volume = {8},
  number = {2},
  pages = {65-68},
  doi = {10.11648/j.ijber.20190802.14},
  url = {https://doi.org/10.11648/j.ijber.20190802.14},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijber.20190802.14},
  abstract = {This paper shows that product differentiation is compatible with perfect competition under free entry and exit and small firm size relative to size of market. Thus, monopolistic competition is a form of perfect competition. Although no product sold under monopolistic competition has a perfect substitute, each product has many close, albeit imperfect, substitutes, which have a cumulative effect on own-price elasticity of demand. With infinitely elastic demand, excess capacity and sub-optimal firm size disappear from monopolistic competition in equilibrium. The number of basic industrial structures is reduced to three—monopoly or single seller, oligopoly or competition among the few, and perfect competition or competition among the many. Perfect competition can be divided into perfect competition with homogeneous products and perfect competition with differentiated products. Advertising can pay off under the latter, since products have separate identities and price depends on quality, even though firms are price takers for any given quality. Under oligopoly, firms will behave like Chamberlin’s monopolistic competitors when certain conditions are met, but there is no guarantee that these conditions ever will prevail. Finally, I ask how small a firm’s share of industry output value must be if it is to be a de facto price taker.},
 year = {2019}
}

Copy | Download

TY  - JOUR
T1  - On the Nature of Equilibrium in Monopolistic Competition
AU  - Richard Lee Carson
Y1  - 2019/05/17
PY  - 2019
N1  - https://doi.org/10.11648/j.ijber.20190802.14
DO  - 10.11648/j.ijber.20190802.14
T2  - International Journal of Business and Economics Research
JF  - International Journal of Business and Economics Research
JO  - International Journal of Business and Economics Research
SP  - 65
EP  - 68
PB  - Science Publishing Group
SN  - 2328-756X
UR  - https://doi.org/10.11648/j.ijber.20190802.14
AB  - This paper shows that product differentiation is compatible with perfect competition under free entry and exit and small firm size relative to size of market. Thus, monopolistic competition is a form of perfect competition. Although no product sold under monopolistic competition has a perfect substitute, each product has many close, albeit imperfect, substitutes, which have a cumulative effect on own-price elasticity of demand. With infinitely elastic demand, excess capacity and sub-optimal firm size disappear from monopolistic competition in equilibrium. The number of basic industrial structures is reduced to three—monopoly or single seller, oligopoly or competition among the few, and perfect competition or competition among the many. Perfect competition can be divided into perfect competition with homogeneous products and perfect competition with differentiated products. Advertising can pay off under the latter, since products have separate identities and price depends on quality, even though firms are price takers for any given quality. Under oligopoly, firms will behave like Chamberlin’s monopolistic competitors when certain conditions are met, but there is no guarantee that these conditions ever will prevail. Finally, I ask how small a firm’s share of industry output value must be if it is to be a de facto price taker.
VL  - 8
IS  - 2
ER  -

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