Chamberlin’s Monopolistic Competition

Chamberlin's "Monopolistic-Competition" Theory

Monopolistic Competition Examples

Edward Hastings Chamberlin (b. 1899) in 1933 published The Theory of Monopolistic Competition as a reorientation of the theory of value, designed to base it on a synthesis of monopolistic and competitive theories. He argues that the old idea of monopoly and competition as alternative is wrong; and that most situations are composites in which elements of both monopoly and compe­tition are combined. But he asserts that the correct procedure is to start from the theory of monopoly. This, he thinks, has the merit of eliminating none of the competitive elements, since these operate through the demand for the monopolist's product; while on the contrary the alternative assumption of competition rules out the monopoly elements.

Thus, in taking monopoly as a starting point, Chamberlin's approach is similar to that of Cournot.

But, while with Cournot the transition to perfect competition takes place only on a scale of numbers of competitors, with Chamberlin it takes place also on a scale of substitution of products. Any producer whose product is significantly different from the products of others has some monopoly of it, subject to the competition of substitutes. He considers each producer in an industry as having some monopoly in his own product. If he be the sole seller of a unique product, he has a pure mo­nopoly.1 If there be two sellers of similar products, the situation is one of "duopoly." If there be several, an "oligopoly" exists. The condition may range through various degrees of oligopoly to pure competition, under which there are so many sellers of a highly standardized product that any one could sell all his product without affecting the demand. Pure competition is found only under the dual condition of (a) a large number, and (b) a perfectly standardized product. The usual condition Chamberlin considers to be in the intermediate area, in which some element of "monopoly" exists, and which he calls "mo­nopolistic competition."

Economic inertia and friction are "imperfections" which he does not consider as part of "monopolistic competition."

Thus Chamberlin's thought centers on the product. Each producer, under "monopolistic competition," faces competition from "substitute" products which are not identical and which are sold by other concerns with various price policies, and sales expenses. These merely limit his "monopoly" of his own product.

The individual demand curve (or sales) for one seller's product is then regarded as affected by the market policies of other indi­vidual sellers whose products are partial substitutes. Total sales of the partly competing group of substitute products are treated as limiting the sales of the product of any one seller. Under "pure" competition (many sellers and a completely standardized product) a horizontal demand curve (average revenue) would exist for each individual competitor's product. This would mean identical prices. Chamberlin argues that "pure" compe­tition would force all individual competitors to treat differential advantages, or rents, as costs, the same as other costs.

Chamberlin emphasizes the effect of judgments by one seller concerning his rivals' policies, possible retaliation, etc. He also argues that selling costs such as advertising are not part of the cost of production, but are incurred to increase the sales of the given product; and thus they affect the demand curve. Through­out, his basic idea is that, no matter how slight, any differentiation of a seller's product gives him to that extent a monopoly. And all these conditions, commonly found in competitive markets, are either "impurities" in the nature of monopoly elements, or are associated with such elements. They make "pure" competi­tion impossible.

To Chamberlin, actual "competition"1 includes the effort of competitors to increase their monopoly powers.

DD’= demand curve (avg. rev.)
PP’= avg. cost of production, including a "min­imum profit" (charge required to attract capital and enterprise) and all "rents"
FF’= avg. total cost, including fixed uniform sell­ing costs
AR= price
EHRR’= profit (above "minimum")
OA= quantity sold
pp’= marginal cost of production
dd’= marginal revenue
Q= intersection of pp' and dd'

And the essence of "monopoly," and therefore of "monopo­listic competition," is seen as lying in differences — (1) differ­ences in price policy, (2) differences in nature of product, and (3) differences in such sales effort as advertising outlays. It is a contribution of Chamberlin's to have developed the second and third of these variables as arising out of the mixture of monopoly and competition.

Chamberlin starts with a single firm and develops the idea of monopoly price and competitive prices as determined by the intersection of revenue or sales curves with expense curves. Either the marginal revenue curve, or the average revenue curve (from which it is derived), may be used to determine the mo­nopoly output and price, the former by intersecting the rising marginal cost curve, the latter by the familiar Marshallian method of fitting the maximum profit area between it and the average cost curve, which includes rents or differentials and thus equals the average price.

The analysis with respect to all three variables then is extended beyond the firm to groups of sellers, which may be taken as cor­responding to conventional "industries," depending on how broadly a "class of product" is conceived in a particular case. The group is analyzed, first under the assumption of symmetry (all its members assumed to have uniform cost and demand curves). Then some consideration is given to what might hap­pen if a "diversity of conditions" existed. If selling costs are not great, and if they reduce the slope of the sellers' demand curves, increasing them may result in a lower price. Varia­tions in product may lead to either smaller or larger outputs. Group equilibrium (with "alert" competitors) must result in the optimum with respect to all the variables, and no profits above a necessary minimum for every producer.

The conclusion is drawn that under monopolistic competition the equilibrium price is higher, and the volume of output prob­ably (not necessarily) lower, than under pure competition. The net profits of enterprise, however, may or may not be higher than under pure competition because of the expense which is required to maintain the monopoly elements and which is often increased by a multiplication of substitute products surrounding the monopolist. Chamberlin argues that monopolistic competition need not bring higher profits to the marginal firm in a given industry. Instead it may allow the existence of a larger number of firms making normal profits.