Monopolistic Competition Revisited

Abstract

The main part of this paper will be devoted to a reformulation of the theory of monopolistic competition. It might be regarded as an indication of how I should develop and present the theory if I were doing it all over again todayin I95I. The underlying principles remain the same; but the order of development in building up the structure is different, and there are a number of shifts in emphasis designed to avoid the many errors in interpretation which have grown up and which have become current in the literature. A second brief part will be devoted to a statement of the difference between the theories of monopolistic and imperfect competition. The theory which I propose does not deal with a particular market form, as has been supposed. Its subject matter is very broad. In includes all monopolies and monopoly elements in the economic system. It likewise includes all competition, if those rare cases of pure competition in the market structure may be regarded as special cases where the monopoly elements are zero. It is a blending of two theories, each of which has been developed in economic analysis under certain perfected conditions. It is thus not a theory of imperfections in any sense, but a general theory, designed to replace that of generalised pure competition (of Marshall or of Walras, for instance) as a point of departure and as a basis for the analysis of the entire economy. It has no particular relation to microas compared to macro-economics, since it deals with the entire economic system in which both of these types of theory have their being. Let us begin our analysis of the structure of the economy by looking briefly at the essential unit of which the structure is composed, namely the firm. It has received a great deal of attention in recent years-Professor Hicks has commented ad nauseam-but I think a great deal of attention was needed in order to restore the balance as against an earlier long