Monopolistic Competition in the Spirit of Chamberlin: Special Results

Abstract

The idea of 'large group' monopolistic competition was first introduced by Chamberlin in I 933. Although a large literature has developed on this topic since that time, it can be argued that few of the models which have been formulated really capture monopolistic competition in Chamberlin's sense. In a companion paper to this one, Hart (i 983), a model was presented which, it was claimed, did satisfy the desiderata of large group monopolistic competition. Specifically, the model had the property that (i) there were many firms producing differentiated commodities; (2) each firm was negligible in the sense that it could ignore its impact on, and hence reactions from, other firms; (3) free entry led to zero profit of operating firms; but (4) each firm faced a downward-sloping demand curve and hence equilibrium price exceeded marginal cost. The model of Hart (I983) was quite general and only such issues as the existence and limiting properties of equilibrium were considered. The purpose of the present paper is to analyse a special case of this model in greater detail, and to consider in this context the old question of whether too few or too many brands are produced under monopolistic competition. Before embarking on the analysis, however, let me briefly indicate why I believe that there is a need for a new model of monopolistic competition (further discussion of this may be found in Hart, I983). In the last few years, a sizeable literature has developed on imperfect competition and product differentiation; see, for example, Dixit and Stiglitz (I977), Lancaster (I979), Salop (I979), and Spence (I976). In much of this literature (see, for example, Spence, I976), markets of fixed, finite size are considered where the entry of firms is limited by the existence of set-up costs. Under these conditions, only a finite number of firms can operate and hence firms will not be negligible in the sense of (2). In addition, due to the 'integer problem', operating firms will generally make strictly positive profits, i.e. (3) is violated. Models of