On the Nature of Equilibrium in Monopolistic Competition
International Journal of Business and Economics Research
Volume 8, Issue 2, April 2019, Pages: 65-68
Received: Mar. 5, 2019; Accepted: Apr. 26, 2019; Published: May 17, 2019
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Author
Richard Lee Carson, Department of Economics, Carleton University, Ottawa, Canada
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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.
Keywords
Monopolistic Competition, Perfect Competition, Product Differentiation
To cite this article
Richard Lee Carson, On the Nature of Equilibrium in Monopolistic Competition, International Journal of Business and Economics Research. Vol. 8, No. 2, 2019, pp. 65-68. doi: 10.11648/j.ijber.20190802.14
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Copyright © 2019 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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