Monopolistic Competition Essay

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SUMMARY OF MONOPOLISTIC COMPETITION

This note offers a summary of monopolistic competition; it introduces the theory of monopolistic competition to readers, including character of this term, definition of production discrimination and production group, the hypothesis of model of monopolistic competition, the demand curve that manufacturers affront and the decision of equilibrium price and output in the presence of monopolistic competition. Moreover, it presents briefly the development and evolvement of this theory.

Introduction The theory of monopolistic competition was put forward independently by American economist Chamberlin and British economist Robinson in 1933. Their literatures are The Theory of Monopolistic Competition——A Reorientation of the Theory of Value and The Economics of Imperfect Competition. This theory denied former mutual opposes viewpoints, which deemed in actual monopoly and competition coexist. It was of important effect to the development of Microeconomics and Price Theory. Monopolistic competition is a kind of market structure that comprises not only monopoly factor, but also competition factor. It is similar to perfect competition in certain aspects, there are lots of independent sellers in the market in the presence of monopolistic competition, and they can freely enter or quit industries. But there is difference that the products are yielded by manufacturer in the presence of monopolistic competition are discrimination products .So each manufacturer has certain monopolistic force in the process of production and distribution, because of discrimination in products. Product discrimination is a basic reason to make monopoly combine with competition. The hypothesis of model of monopolistic competition includes three terms: firstly, large numbers of manufacturer yield similar but differential products, and there is no limitation when they enter or quit market; secondly, the number of manufacturers is so many in the same product group that each one all expects his actions will not be noticed by others; thirdly, all manufacturers in the same product group affront similar cost curves and demand curves. Sellers act on a symmetric heterogenous market, entertain beliefs about the market structure, and maximize conjectural profit functions. In order to realize the maximal profit, they can change sales volume by three ways: adjusting the price of commodity, changing the character of product and enlarging the payout on advertisement and drumbeating. These are so-called price competition and non-price competition.

Evolutionary Justification The author of the paper “A new justification of monopolistic competition”, Werner Guth, a professor of Humboldt-University who showed that conjectural profit functions neglecting strategic interdependence are (neutrally) evolutionarily stable. For the theory of monopolistic competition (Chamberlin, 1933;Robinson, 1933) basically requires sellers to neglect their mutual strategic interdependence: Sellers act as if they were monopolists. However this note offers an evolutionary justification for such a behavior: Sellers act on a symmetric heterogenous market whose products are either complements or substitutes. While true profit functions reflecting the particular market structure do exist, sellers may not be aware of them. Instead sellers may entertain beliefs about the market structure leading them to maximize—what will be called— conjectural profit functions. Conjectural profit functions guide sellers’ actions, but true profit functions determine success. To study deeply the evolutionary stability of conjectural profit functions they apply the indirect evolutionary approach: they establish two model types according to actions which sellers act on the market. In model A it is assumed that the conjectural profit functions are common knowledge. Although this is not unusual it appears rather
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