Monopolistic Competition Chapter 17

Edward Chamberlin Theory of Monopolistic Competition (1933)

Joan Robinson The Economics of Imperfect Competition (1933)

Between Monopoly and 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 Short Run

Figure 1b Monopolistic Competitors in the Short 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 Long Run

Figure 3a Monopolistic versus Perfect Competition

Figure 3b Monopolistic versus Perfect Competition

Excess Capacity Total average cost is not at a minimum.

Advertising Pros Provides information. Promotes competition. Cons Increases costs. Information can be misleading.

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Table 1 Monopolistic Competition: Between Perfect Competition and Monopoly Copyright©2004 South-Western