Small-group monopolistic competition in a global computable general equilibrium model: Meeting the Markusen challenge

This paper shows that product differentiation is compatible with perfect competition under free entry and exit and small firm size relative to size of market. Thus, monopolistic competition is a form of perfect competition. Although no product sold under monopolistic competition has a perfect substitute, each product has many close, albeit imperfect, substitutes, which have a cumulative effect on own-price elasticity of demand. With infinitely elastic demand, excess capacity and sub-optimal firm size disappear from monopolistic competition in equilibrium. The number of basic industrial structures is reduced to three—monopoly or single seller, oligopoly or competition among the few, and perfect competition or competition among the many. Perfect competition can be divided into perfect competition with homogeneous products and perfect competition with differentiated products. Advertising can pay off under the latter, since products have separate identities and price depends on quality, even though firms are price takers for any given quality. Under oligopoly, firms will behave like Chamberlin’s monopolistic competitors when certain conditions are met, but there is no guarantee that these conditions ever will prevail. Finally, I ask how small a firm’s share of industry output value must be if it is to be a de facto price taker.

In market economy, there are four types of markets: perfect competition, monopolistic competition, oligopoly, monopoly. The main differences among them are the ability to set price, barrier to enter and exit the market, numbers of companies. To study innovation’s efficiency in these markets, it is necessary to understand their special characteristics. To simplify the problem, when patent is employed, only the innovation company has the access to this new technology. When it does not exist, every company in the market can use the new technology. In perfect competition market, there are no barrier to enter or exit and lots of companies producing identical products, so no company can set the price. Because there is no barrier, companies that can earn profit will enter the market, which decreases the price. Eventually, all companies’ marginal cost, average cost and marginal benefit is equal to the price, average benefit. In other words, companies in perfect competition market earn zero economic profit. Social welfare is always maximum in this type of markets. In this case, when one company discovers new production technology, other companies will follow immediately. Lower cost causes higher supply, which makes the price decrease and equal to the average cost eventually, leaving every company having zero economic profit, including the first company discovered the new technology, so there is no incentive for any company to spend resource on innovation. However, consumers’ welfare would increase because of lower price. When patent is employed, one company can produce products in a lower price and earn certain economic profit, but can hardly make an influence on the market because there are too many suppliers. Thus, in perfect competition market, patent is a good way to provide incentives for innovations. In monopolistic competition market, there are lots of companies selling slightly different products. The difference among products enables one company to increase the price over in a limited range, so monopolistic competition market is inefficient. In this type of markets, there are two types of innovations: technology and product. The former one reduces the cost and has the same consequence as that in perfect competition market. The latter one, product innovation, makes the product more special, giving the company more market power. However, without patent, product innovation will be copied easily, making the original product less special and canceling out the market power gained by the original company. Since there is no economic benefit, there is no incentive for any company in the market to innovate. When patent is employed, products’ difference is kept and gives the company more market power since there is consumer preference in monopolistic competition market. This increase of market power is not as negligible as that in perfect competition market, so the market becomes less efficient when the company with patent increases the price. In oligopoly market, there are only a few companies with great market power, so all of them can set the price. In this market, companies make decision based on both output and price effects. Output effect means when price is higher than marginal cost, companies can increase profit by increase its output. Price effect means when a company increases its output, the market price goes down, causing less profit for the company. When output effect is more impactful than price effect, companies will increase sales. When price effect is more impactful than output effect, companies will decrease sales. Oligopoly market can be inefficient without restrictions. Regarding innovations, there is still no incentives without the presence of patents. With patent, innovation company will gain market power that is huge enough to cause inefficiency and even to force other companies to exit the market. Thus, patent in oligopoly market will cause negative impact on society, which should be limited. The last type of markets if monopoly. In monopoly market, there is only one company, so patent is necessary. When this company innovates and decreases its production cost, it will tend to increase its output to maximize profit, which enlarges consumers’ welfare. However, this increase is not as much as that in perfect competition market, so innovation in monopoly market is still inefficient.

Previous articleNext article No AccessDo Competition and Monopolistic Competition Differ?Harold DemsetzHarold Demsetz Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by Journal of Political Economy Volume 76, Number 1Jan. - Feb., 1968 Article DOIhttps://doi.org/10.1086/259390 Views: 2Total views on this site Citations: 25Citations are reported from Crossref Copyright 1968 The University of ChicagoPDF download Crossref reports the following articles citing this article:Yongtae Kim, Lixin (Nancy) Su, Gaoguang (Stephen) Zhou, Xindong (Kevin) Zhu PCAOB international inspections and Merger and Acquisition outcomes, Journal of Accounting and Economics 70, no.11 (Aug 2020): 101318.https://doi.org/10.1016/j.jacceco.2020.101318Alex Frino, Vito Mollica, Eleonora Monaco, Riccardo Palumbo The effect of algorithmic trading on market liquidity: Evidence around earnings announcements on Borsa Italiana, Pacific-Basin Finance Journal 45 (Oct 2017): 82–90.https://doi.org/10.1016/j.pacfin.2016.07.003Erwin Dekker,, Pavel Kuchař Exemplary Goods: The Product as Economic Variable, Schmollers Jahrbuch 136, no.44 (Dec 2016): 237–255.https://doi.org/10.3790/schm.136.4.237Erwin Dekker,, Pavel Kuchař Exemplary Goods: The Product as Economic Variable, Schmollers Jahrbuch 136, no.33 (Sep 2016): 237–255.https://doi.org/10.3790/schm.136.3.237Erwin Dekker, Pavel Kuchaa Exemplary Goods: The Product as Economic Variable, SSRN Electronic Journal (Jan 2016).https://doi.org/10.2139/ssrn.2841682Vicente Pina, Lourdes Torres, Patricia Bachiller Service quality in utility industries: the European telecommunications sector, Managing Service Quality: An International Journal 24, no.11 (Jan 2014): 2–22.https://doi.org/10.1108/MSQ-03-2013-0034Alex Frino, Vito Mollica, Robert I. Webb The Impact of Co-Location of Securities Exchanges' and Traders' Computer Servers on Market Liquidity, Journal of Futures Markets 34, no.11 (Jul 2013): 20–33.https://doi.org/10.1002/fut.21631David M. Levy, Michael D. Makowsky Price dispersion and increasing returns to scale, Journal of Economic Behavior & Organization 73, no.33 (Mar 2010): 406–417.https://doi.org/10.1016/j.jebo.2009.10.004Douglas Sutherland, Sonia Araujo, Balázs Égert, Tomasz J. Kozluk Infrastructure Investment: Links to Growth and the Role of Public Policies, SSRN Electronic Journal (Jan 2009).https://doi.org/10.2139/ssrn.1360870Michele LaPlante, Chris J. Muscarella Do institutions receive comparable execution in the NYSE and Nasdaq markets? A transaction study of block trades, Journal of Financial Economics 45, no.11 (Jul 1997): 97–134.https://doi.org/10.1016/S0304-405X(97)81614-5M. L. GREENHUT, W. J. LANE A THEORY OF OLIGOPOLISTIC COMPETITION, The Manchester School 57, no.33 (Sep 1989): 248–261.https://doi.org/10.1111/j.1467-9957.1989.tb00814.xMichael R. Darby, John R. Lott Qualitative information, reputation, and monopolistic competition, International Review of Law and Economics 9, no.11 (Jun 1989): 87–103.https://doi.org/10.1016/0144-8188(89)90008-2Leonard V. Zumpano, Donald L. Hooks The Real Estate Brokerage Market: A Critical Reevaluation, Real Estate Economics 16, no.11 (Mar 1988): 1–16.https://doi.org/10.1111/1540-6229.00440R. Rothschild The Theory of Monopolistic Competition: E.H. Chamberlin's Influence on Industrial Organisation Theory over Sixty Years, Journal of Economic Studies 14, no.11 (Jan 1987): 34–54.https://doi.org/10.1108/eb002641STEPHEN E. MARGOLIS THE EXCESS CAPACITY CONTROVERSY: A CRITIQUE OF RECENT CRITICISM, Economic Inquiry 23, no.22 (Apr 1985): 265–275.https://doi.org/10.1111/j.1465-7295.1985.tb01764.xBruce L. Benson Spatial competition with free entry, Chamberlinian tangencies, and social efficiency, Journal of Urban Economics 15, no.33 (May 1984): 270–286.https://doi.org/10.1016/0094-1190(84)90002-0W. Duncan Reekie Advertising and Price, International Journal of Advertising 1, no.22 (Mar 2015): 131–141.https://doi.org/10.1080/02650487.1982.11104843 Benjamin Klein , and Keith B. Leffler The Role of Market Forces in Assuring Contractual Performance, Journal of Political Economy 89, no.44 (Oct 2015): 615–641.https://doi.org/10.1086/260996MICHAEL M. MURPHY THE CONSISTENCY OF PERFECT AND MONOPOLISTIC COMPETITION, Economic Inquiry 16, no.11 (Jan 1978): 108–112.https://doi.org/10.1111/j.1465-7295.1978.tb00496.xH. OHTA ON THE EXCESS CAPACITY CONTROVERSY, Economic Inquiry 15, no.22 (Apr 1977): 153–165.https://doi.org/10.1111/j.1465-7295.1977.tb00463.x William Mark Crain , and Robert B. Ekelund, Jr. Chadwick and Demsetz on Competition and Regulation, The Journal of Law and Economics 19, no.11 (Oct 2015): 149–162.https://doi.org/10.1086/466859 Richard Schmalensee A Note on Monopolistic Competition and Excess Capacity, Journal of Political Economy 80, no.3, Part 13, Part 1 (Oct 2015): 586–591.https://doi.org/10.1086/259907 Harold Demsetz The Inconsistencies in Monopolistic Competition: A Reply, Journal of Political Economy 80, no.3, Part 13, Part 1 (Oct 2015): 592–597.https://doi.org/10.1086/259908L. G. Telser On the Regulation of Industry: A Note, (Jan 1972): 187–205.https://doi.org/10.1007/978-1-349-15486-9_11 L. G. Telser On the Regulation of Industry: A Note, Journal of Political Economy 77, no.66 (Oct 2015): 937–952.https://doi.org/10.1086/259582

Comment

Geographical AnalysisVolume 14, Issue 1 p. 51-63 Free Access Equilibrium Market Area Properties under Two Pricing Systems Gordon F. Mulligan, Gordon F. Mulligan Gordon F. Mulligan is assistant professor of geography, University of Arizona. This work was carried out under the Summer Research Award Program of the College of Business and Public Administration at the University of Arizona. The author wishes to thank an anonymous referee for his helpful comments.Search for more papers by this author Gordon F. Mulligan, Gordon F. Mulligan Gordon F. Mulligan is assistant professor of geography, University of Arizona. This work was carried out under the Summer Research Award Program of the College of Business and Public Administration at the University of Arizona. The author wishes to thank an anonymous referee for his helpful comments.Search for more papers by this author First published: January 1982 https://doi.org/10.1111/j.1538-4632.1982.tb00054.xCitations: 7 Gordon F. Mulligan is assistant professor of geography, University of Arizona. This work was carried out under the Summer Research Award Program of the College of Business and Public Administration at the University of Arizona. The author wishes to thank an anonymous referee for his helpful comments. AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat LITERATURE CITED Alao, N., et al. (1977). Christaller Central Place Structures: An Introductory Statement. Evanston: Northwestern University Press. Beckmann, M. J. (1972). “Equilibrium versus Optimum: Spacing of Firms, and Patterns of Market Areas.” In Recent Developments in Regional Science, (edited by R. Funck. London: Pion. Beckmann, M. J. (1976). “Spatial Price Policies Revisited.” Bell Journal of Economics, 7: 619– 30. Bollobás, B., and N. Stern (1972). “The Optimal Structure of Market Areas.” Journal of Economic Theory, 4: 174– 79. Eaton, B. C. (1976). “Free Entry in One-Dimensional Models: Pure Profits and Multiple Equilibria.” Journal of Regional Science, 16: 21– 33. Eaton, B. C., and R. G. Lipsey (1976). “The Non-Uniqueness of Equilibrium in the Löschian Location Model.” American Economic Review, 66: 77– 93. Long, W. (1971). “Demand in Space: Some Neglected Aspects.” Papers, Regional Science Association, 27: 45– 60. Lösch, A. (1954). The Economics of Location. Translated by W. H. Woglom and W. F. Stolper. New Haven: Yale University Press. Mills, E. S., and M. R. Lav (1964). “A Model of Market Areas with Free Entry.” Journal of Political Economy, 72: 278– 88. Mulligan, G. F. (1981). “Lösch's Single-Good Equihbrium.” Annals, Association American Geographers, 71: 84– 94. Uspensky, J. V. (1948). Theory of Equations. New York: McGraw-Hill. Webber, M. J. (1974). “Free Entry and the Locational Equilibrium.” Annals, Association American Geographers, 64: 17– 25. Citing Literature Volume14, Issue1January 1982Pages 51-63 ReferencesRelatedInformation

This paper presents a theoretical analysis of the nature of an optimal emissions tax when firms’ emissions are not perfectly observable, specifically in two types of market structure: perfect competition and Cournot competition with and without free market entry. The purpose is to examine how the optimal tax is affected by enforcement costs and the market structure. We find that market imperfections and enforcement costs push the optimal tax lower than the marginal damage to society when the number of firms in the market is exogenous. However, when the number of firms is determined endogenously, enforcement costs generate two countervailing effects on the optimal tax. The direct effect is that higher marginal enforcement costs push the optimal tax lower. The indirect effect of enforcement costs results from the role of the tax as a deterrent to entry. Limiting entry and hence the resources expended on enforcement improves social welfare. Thus, the overall effect of enforcement costs on the optimal tax depends on the strength of direct relative to indirect effects of these costs when there is free entry and exit.

Spatial competition with free entry, Chamberlinian tangencies, and social efficiency

This chapter reviews some important issues of strategic trade literature that use the assumption of imperfect competition and increasing returns of scale. One of the seminal papers by Krugman (Import protection as export promotion: international competition in the presence of oligopoly and economies of scale. Kierzkowski H (ed) Monopolistic competition and international trade. Oxford University Press, Oxford, 1984) seeks to formalize the notion that import protection leads to export promotion in the presence of economies of scale (both static and dynamic). However, Krugman argues that in the absence of dynamic scale economies, the formalization of this idea appears to require the “heterodox” assumption that marginal costs are decreasing. This chapter seeks to extend Krugman by providing an alternative foundation for the idea based on free entry and linear marginal costs. Interestingly, the welfare implications are sensitive to whether there is free entry in only one of the countries, or both, as well as to whether import protection is of the tariff or the nontariff kind.

The paper aims to identify the structure of export market for Acacia wooden furniture products, simultaneously determine the fundamentals forming the market structure and propose marketing solutions for market development. The inequality index (GINI) and concentration ratio (CR) were used to analyze market structure. GINI coefficients calculated over transaction value of sellers and buyers were 0.63 and 0.60 while the concentration ratios (CR5) were respectively 33.18% and 39.24%. The results reflected the market's situation as monopolistic competition with high concentration level from both sellers and buyers. Large population of sellers and buyers filled the market. However, economic efficiency in terms of scale was a primary barrier creating restriction when entering the market. Market development solutions include: improve capacity on design; develop standards and brands for wood materials and products; certification of goods according to international standards and regulations; restriction towards export of low-pricing products; sustain existing markets and exploit new markets; support enterprises to implement the B2C trading model by Vietnamese Furniture associations; establish a specialized center of information and exhibitions for Vietnam's wooden furniture.

IN RECENT years researchers have increasingly recognized the similarities between problems in spatial economics and problems of product differentiation in monopolistic competition. Authors working from the spatial side have tried to outline some of the implications of spatial economics for traditional microtheory. At the same time, other writers such as Lancaster [17] have developed models of product differentiation which have a spatial flavor. It has become apparent that spatial economics can provide considerable insight into monopolistic competition. In this paper we address a long smoldering debate in the theory of the firm concerning whether or not monopolistic competition is a distinctly different case from perfect competition and monopoly. The issue was ignited by Demsetz [8], [9], [10] who questioned both the capacity theorem of monopolistic competition and the consistency of the underlying assumptions. Later Barzel [1] and Schmalensee [22] presented analyses that appeared to have successfully doused Demsetz' criticism of the excess capacity theorem. Recently, however, the debate has been rekindled by Greenhut [14], Ohta [21] and Murphy [20]. Most of the disagreement has been encamped around the excess capacity/efficiency question. A separate but related series of papers in the spatial competition literature (e.g. Eaton and Lipsey [11], [12], [13], and Capozza and Van Order [7]) has challenged the consistency of the free entry and zero profits assumptions. The link between the Demsetz inconsistency arguments and similar reasoning in the spatial competition literature is most apparent if one views product differentiation, a basis of monopolistic competition, as a locational concept (see for example Lovell [18], Eaton and Lipsey [13]). Indeed product differentiation in many large firms is a marketing problem where modern methods call for positioning products in the consumers' n-dimensional characteristics space. We try to demonstrate that monopolistic competition is indeed a distinct structure. We use a spatial model where monopolistic competition is the typical intermediate case while monopoly and perfect competition are extreme cases. We then argue that product differentiation, which has been the usual rationale for monopolistic competition, can be modelled in a manner analogous to the spatial model, implying a large degree of generality than our model.

Optimal lot size, inventories, prices and JIT under monopolistic competition

Despite the fact that the assumptions underlying perfect competition never actually hold, the use of the competitive model, as an idealization, is justified if the predictions of the model approximate the outcomes of situations it is used to represent. In partial equilibrium analysis, this justification is embodied in the Folk which states that if firms are small relative to the market, then the market outcome is approximately competitive. This paper provides a precise statement and proof of the Folk for competitive markets with a single homogeneous good, and free entry and exit. It is shown that if firms are small relative to the market then there is a Cournot equilibrium with free entry; furthermore, any Cournot equilibrium with free entry is approximately competitive. More specifically, if we consider an appropriate sequence of markets in which firms become arbitrarily small relative to the market, then there is a Cournot equilibrium with free entry for all markets in the tail of the sequence, and aggregate equilibrium output converges to perfectly competitive output. If firms have strictly U-shaped average cost curves, then individual firm behaviour converges to competitive behaviour. The treatment of free entry distinguishes this paper from other papers dealing with the Folk , where either the number of firms is exogeneous, ruling out free entry, or free entry is treated as being equivalent to a zero profit condition, ignoring the integer problem that arises when the number of firms is finite but unspecified. Firms may become small relative to the market in two ways: through changes in technology, absolute firm size (the smallest output at which minimum average cost is attained) may become small, or, through shifts in demand, the absolute size of the market (the market demand at competitive price) may become large. We allow both types of changes here, though shifts in demand, especially in the form of replication of the consumer sector, may be more familiar. In his conclusion, Ruffin (1971) presents a verbal argument for the Folk which is based on replication of demand and entry. Hart (1979), though not concerned with existence, shows that in a general equilibrium model with differentiated products and free entry, equilibria are approximately competitive (Pareto optimal) when consumers have been replicated a sufficient number of times. The paper is organized as follows: Section 1 contains the perfectly competitive model and its assumptions, Section 2 contains the assumptions and definitions for the imperfectly competitive model, Section 3 contains an example contrasting the usual treatment of the Folk Theorem and the present approach, Section 4 contains the proofs of the main results, and Section 5 contains remarks on the results and indicates how some of the assumptions that are used can be weakened.

We examine a model of conspicuous consumption and explore the nature of competition in markets for conspicuous goods. We assume that, in addition to intrinsic utility, individuals seek status, and that perceptions of wealth affect status. Under identifiable conditions, the model generates Veblen effects: utility is positively related to the price of the good consumed. Equilibria are then characterized by the existence of "budget' brands (which are sold at a price equal to marginal cost), as well as 'luxury" brands (which are sold at a price above marginal cost, despite the fact that producers are perfectly competitive). Luxury brands are not intrinsically superior to budget brands but are purchased by consumers who seek to signal high levels of wealth. Within the context of this model, an appropriately designed luxury tax is a non-distortionary tax on pure profits.

Exploring the effects of social responsibility on coordination and profit division in a supply chain

Endogenous, imperfectly competitive business cycles