On Equilibrium in Monopolistic Competition
The price, output, and quality of a monopolistic competitor are determined by maximizing the difference between its revenue and its cost, where cost is measured exclusive of the rent on its product-specialized inputs. It can be argued that such a firm must have unique inputs that are specialized to its unique product—since product differentiation is otherwise compatible with perfect competition—and the uniqueness of these inputs allows them to earn positive rent, even in long-run equilibrium. The inclusion of rent in cost gives rise to the traditional Chamberlinian solution, in which (rent-inclusive) average cost is tangent to demand and therefore downward-sloping. But if rent is excluded, average cost may be constant or even upward-sloping in equilibrium, and in this sense, monopolistic competition need not give rise to excess capacity or to production facilities that are too small. The basic conclusion is that monopolistic competition improves welfare—that is to say, it creates consumer and producer surplus—by creating variety without necessarily reducing output.
Volume (Year): 32 (2006)
Issue (Month): 3 (Summer)
|Contact details of provider:|| Postal: c/o Dr. Alexandre Olbrecht, The Anisfield School of Business 205, Ramapo College, 505 Ramapo Valley Road, Ramapo, New Jersey 07430, USA|
Phone: (201) 684-7346
Web page: https://www.quinnipiac.edu/eea/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Margolis, Stephen E, 1985. "The Excess Capacity Controversy: A Critique of Recent Criticism," Economic Inquiry, Western Economic Association International, vol. 23(2), pages 265-75, April.
- Dixit, Avinash K & Stiglitz, Joseph E, 1977.
"Monopolistic Competition and Optimum Product Diversity,"
American Economic Review,
American Economic Association, vol. 67(3), pages 297-308, June.
- Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
- Barzel, Yoram, 1970. "Excess Capacity in Monopolistic Competition," Journal of Political Economy, University of Chicago Press, vol. 78(5), pages 1142-49, Sept.-Oct.
- Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
- N. Gregory Mankiw & Michael D. Whinston, 1986. "Free Entry and Social Inefficiency," RAND Journal of Economics, The RAND Corporation, vol. 17(1), pages 48-58, Spring.
- Ohta, H, 1977. "On the Excess Capacity Controversy," Economic Inquiry, Western Economic Association International, vol. 15(2), pages 153-65, April.
- Schmalensee, Richard, 1972. "A Note on Monopolistic Competition and Excess Capacity," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages 586-91, May-June.
- Murphy, Michael M, 1978. "The Consistency of Perfect and Monopolistic Competition," Economic Inquiry, Western Economic Association International, vol. 16(1), pages 108-12, January.
When requesting a correction, please mention this item's handle: RePEc:eej:eeconj:v:32:y:2006:i:3:p:421-435. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Victor Matheson, College of the Holy Cross)
If references are entirely missing, you can add them using this form.