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Is There Excess Capacity Really?

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  • Todorova, Tamara

Abstract

Excess capacity is viewed as a distinctive feature and an essential inefficiency of monopolistic competition as the large-group case of imperfect competition. Using a simple geometrical approach and studying the demand and cost curves faced by the individual firm, we find that there is little potential for excess capacity in monopolistically competitive markets, opposite to the common perception and wide coverage in the literature. We see monopolistic competition as the true type of competition in the presence of transaction costs where perfect competition is a hypothetical and ideal benchmark which cannot exist under positive transaction costs.

Suggested Citation

  • Todorova, Tamara, 2015. "Is There Excess Capacity Really?," EconStor Preprints 157217, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:157217
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    File URL: https://www.econstor.eu/bitstream/10419/157217/1/Excess%20Capacity.pdf
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    References listed on IDEAS

    as
    1. Demsetz, Harold, 1982. "Barriers to Entry," American Economic Review, American Economic Association, vol. 72(1), pages 47-57, March.
    2. Demsetz, Harold, 1972. "The Inconsistencies in Monopolistic Competition: A Reply," Journal of Political Economy, University of Chicago Press, vol. 80(3), pages 592-597, May-June.
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    Cited by:

    1. Dale Squires & Kathleen Segerson, 2022. "Capacity and Capacity Utilization in Production Economics," Springer Books, in: Subhash C. Ray & Robert G. Chambers & Subal C. Kumbhakar (ed.), Handbook of Production Economics, chapter 24, pages 1001-1037, Springer.
    2. Samidh Pal, 2023. "Causes of Excess Capacity," Papers 2304.02137, arXiv.org.

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    More about this item

    Keywords

    excess capacity; monopolistic competition; oligopoly; transaction costs;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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