MONOPOLISTIC COMPETITION

Monopolistic competition was firstly introduced by the American economist Edward Hastings Chamberlin (1933) in his Theory of monopolistic competition (1933) and by the British economist Joan Robinson (1933) in her Economics of Imperfect Competition (1933) to formalise an industry configuration that differs from the extreme situations of perfect competition and monopoly. The monopolistic competition model assumes the presence of (i) a high number of firms, (ii) complete and perfect information,(iii) symmetric technology,(iv) free entry/exit from the market. Even if there are similar hypotheses, this market structure differs from the perfect competition because of an additional requirement: product differentiation (or similar conditions such as market fragmentation). Under this particular hypothesis, firms have a certain degree of market power. For this reason, firms are not price takers, as it would be under PC, but price makers, and they can charge a higher price to consumers. Besides, by removing the perfect substitutability assumption between products, in this case each firm faces a downward-sloping demand. Conversely, the benchmark case of PC is characterised by a perfectly elastic demand curve. Another property distinguishes monopolistic competition from the oligopolistic competition with free entry; that is, in monopolistic competition a price change by one firm has only a negligible effect on the demand of any other firm. In equilibrium, the solution to the profit maximization problem of the firm guarantees, as in the monopolistic market, the equality between marginal cost and marginal revenue with an extra-profit for the firm which is exactly equal to the difference between the selling price and the average cost.

Editor: Bianca GIANNINI
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