Monopolistic competition

Lecture Series No:11

Monopolistic competition is a form of imperfect competition where many competing producers sell products that are differentiated from one another (that is, the products are substitutes but, with differences such as branding, are not exactly alike). In it, a firm takes the prices charged by its rivals as given but ignores the impact of its own prices on the prices of other firms.^[1] In monopolistic competition, firms can behave like monopolies in the short run, including using market power to generate profit. In the long run, other firms enter the market and the benefits of differentiation decrease with competition; the market becomes more like perfect competition where firms cannot gain economic profit. However, in reality, if consumer rationality/innovativeness is low and heuristics is preferred, monopolistic competition can fall into natural monopoly, at the complete absence of government intervention.^[2] At the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition was Edward Hastings Chamberlin in his pioneering book on the subject Theory of Monopolistic Competition (1933).^[3] Joan Robinson also receives credit as an early pioneer on the concept