Edward Chamberlin Product Differentiation, Chamberlin Economics

One of the most important elements of Chamberlin's new theory of monopolistic competition was that most firms involve themselves not only in price competition but in nonprice competition as well. Though a large number of firms might exist in a market (the competitive element in monopolistic competition), each was viewed by Chamberlin as having a unique product or advantage that gave it some control over price (the monopoly element in monopolistic competition). Each seller, because of this monopoly element, would be able to vary price.

What were these monopoly elements? Sraffa had already described some of them in a general way, as we have seen, but Chamberlin specifically noted such items as copyrights, trademarks, brand names, and economic space (i.e., where products might be identical but where buyers, because of the distances involved, would have loca-tional allegiances). Chamberlin clearly expounded the dual nature of most markets:
In this field of "products" differentiated by the circumstances surrounding their sale, we may say, as in the case of patents and trade-marks, that both monopolistic and competitive elements are present. The field is commonly regarded as competitive, yet it differs only in degree from others which would at once be classed as monopolistic. In retail trade, each "product" is rendered unique by the individuality of the establishment in which it is sold, including its location (as well as by trademarks, qualitative differences, etc.); this is its monopolistic aspect. Each is subject to the competition of other "products" sold under different circumstances and at other locations; this is its competitive aspect. Here, as elsewhere in the field of differentiated products, both monopoly and competition are always present (The Theory of Monopolistic Competition, p. 63).
Many examples of Chamberlin's theory come to mind. Take aspirin (for the moment, ignore the issue of whether all aspirin is the same). Numerous brands exist: Advil, Empirin, Bufferin, Aleve, Bayer, and many, many others. Through advertising and packaging, each brand is established and differentiated, thus creating a market of buyers who demand a specific product. Depending upon the size and intensity of demand in any specific case, the seller can charge a monopolistic price that may differ from that of his or her competitors. Although a large number of substitutes compete for the consumer's aspirin dollar, price differentials can exist.
These differences can exist, of course, whether or not all aspirin is alike. Product differentiation, in other words, may convince the consumer that differences exist, even when they in fact do not. The aim of this activity is to increase buyer allegiance for, and the number of buyers of, the product. In this manner, profits are increased (in the short run, at least).

Product differentiation, as Chamberlin suggests in the quotation above, may be of yet another form—economic space. Location may differentiate the products of sellers, and it may indeed be the overriding consideration. Suppose, for example, that five drugstores exist in a large city and further assume that they are alike in service and range of offerings. Though the products—drugstores—appear to be alike in every respect, Chamberlin would point out that they are differentiated with respect to location. The degree of monopoly and the degree of freedom with which any store can price will depend upon the number and dispersion of drugstore demanders, as well as upon the location of competing sellers. Location is then part and parcel of product differentiation.

A multiplicity of other examples of differentiation could be cited. Automobiles are differentiated, but substitutability still exists. Furniture, toothpaste, suppliers of identical but locationally differentiated raw materials, fine china, the neighborhood grocer, clothing, etc., are all differentiated markets. Chamberlin's point was well made and may be summarized as follows: There exists practically no market that is not characterized by monopoly elements. These monopoly elements are manifested by some form of differentiation: product, location, or service, for example. This fact means that each seller has some control over price, however small. When much (littie) substitutability exists, the demand for the product is more (less) elastic, giving the individual seller less (more) control over price. Whereas Marshall regarded price as the sole variable under analysis in value theory, Chamberlin regarded both price and the product itself as variables under the control of firms in markets characterized by elements of both competition and monopoly.