The Inconsistencies in Monopolistic Competition: A Reply

Abstract

The controversy over the monopolist competition model has been rekindled by Profs. Yoram Barzel (1970) and Richard Schmalensee (1972), who have taken issue with the major conclusions of earlier work of mine. I accept Barzel's criticism that I did not adequately take into account varitions in product quality. His comment has forced me to think again about monopolistic competition along somewhat different and, I believe, more fruitful lines. While accepting Barzel's methodological criticisms and Schmalensee's mathematics, I nonetheless wish to defend here the two main conclusions of my earlier work-the invalidity of the excess-capacity theorem and the failure of monopolist competition to add anything of substance to competition and monopoly models.1 The monopolistic competition model stands astride three important assumptions. The first two are free entry and large numbers of firms, the competitive components of the model. The third-product differentiationis the monopolistic component. These assumptions are used to derive the familiar zero-profit equilibrium of the firm to the left of the minimum point of its average cost curve. The derivation of this equilibrium, however, is obscure, even though Chamberlin's exposition is an example par excellence of a clear description of the mechanics of the model. The obscurity stems not from the mechanics but from the neglected problem of establishing consistency, both among these three assumptions and between these assumptions and others that lie outside the model but which, nonetheless, are firmly entrenched in economics, such as the assumption that consumers seek to maximize utility.