Monopolistic Competition in the Industrial Era

In the previous chapter, we considered an industrial production function without specifying a market economy. This chapter presents a microeconomic foundation of the previous industrial production function, in which the fixed cost δ is now interpreted as a fixed operation cost incurred by firms with monopolistic power over their products. As North and Thomas (1973, p. 156) write, “England […] by 1700 […] had developed an efficient set of property rights embedded in the common law [and…] begun to protect private property in knowledge with its patent law. The stage was now set for the industrial revolution.” Specifically, one can think of the industrial production function in (7.5) as a reduced-form representation of a market structure of monopolistic competition. In this extended Malthusian growth model with a market structure of monopolistic competition, the transition from agricultural production to industrial production can become gradual, and this gradual industrial transition is more consistent with the Industrial Revolution…