Monopolistic Competition

Chapter 17

Edward Chamberlin

Theory of Monopolistic Competition (1933)

Joan Robinson

The Economics of Imperfect Competition

(1933)

Between Monopoly Between Monopoly and Perfect Competitionand Perfect Competition

Like monopoly:

Unique product.

Downward sloping demand & MR curves.

Price > MC

Like perfect competition:

Other products are substitutes—although not perfect substitutes.

Free entry and exit.

Economic profits are driven to zero.

Figure 1a Monopolistic Competitors in the Figure 1a Monopolistic Competitors in the Short RunShort Run

Figure 1b Monopolistic Competitors in the Figure 1b Monopolistic Competitors in the Short RunShort Run

Entry and Exit

Entry increases the availability of substitutes and shifts the demand curve to left.

Exit reduces the availability of substitutes and shifts the demand curve to the right.

Figure 2 A Monopolistic Competitor in the Figure 2 A Monopolistic Competitor in the Long RunLong Run

Figure 3a Monopolistic versus Perfect Figure 3a Monopolistic versus Perfect CompetitionCompetition

Figure 3b Monopolistic versus Perfect Figure 3b Monopolistic versus Perfect CompetitionCompetition

Excess Capacity

Total average cost is not at a minimum.

Advertising

• Pros

Provides information.

Promotes competition.

• Cons

Increases costs.

Information can be misleading.

Brand Names

Table 1 Monopolistic Competition: Between Perfect Competition and Table 1 Monopolistic Competition: Between Perfect Competition and MonopolyMonopoly

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