Abstract
This paper critically reviews and resolves some controversies on the so-called “excess capacity” theorem that allegedly are deducible from the theory of monopolistic competition. The fundamental model initially focuses attention on the main sources of confusion, which are shown to relate to certain terminological ambiguities. The conditions under which an unambiguously defined excess capacity can be set forth are discussed herein. Finally, and perhaps most importantly, the paper goes beyond critiques and proposes a dynamic adjustment mechanism which would establish the properties of a full equilibrium under conditions of productive efficiency for the otherwise static framework of monopolistic competition.
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