On Equilibrium in Monopolistic Competition

Richard Carson ()
Additional contact information
Richard Carson: Carleton University

Eastern Economic Journal, 2006, vol. 32, issue 3, 421-435

Abstract: The price, output, and quality of a monopolistic competitor are determined by maximizing the difference between its revenue and its cost, where cost is measured exclusive of the rent on its product-specialized inputs. It can be argued that such a firm must have unique inputs that are specialized to its unique product—since product differentiation is otherwise compatible with perfect competition—and the uniqueness of these inputs allows them to earn positive rent, even in long-run equilibrium. The inclusion of rent in cost gives rise to the traditional Chamberlinian solution, in which (rent-inclusive) average cost is tangent to demand and therefore downward-sloping. But if rent is excluded, average cost may be constant or even upward-sloping in equilibrium, and in this sense, monopolistic competition need not give rise to excess capacity or to production facilities that are too small. The basic conclusion is that monopolistic competition improves welfare—that is to say, it creates consumer and producer surplus—by creating variety without necessarily reducing output.

Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://web.holycross.edu/RePEc/eej/Archive/Volume32/V32N3P421_435.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eej:eeconj:v:32:y:2006:i:3:p:421-435

Access Statistics for this article

Eastern Economic Journal is currently edited by Cynthia A. Bansak, St. Lawrence University and Allan A. Zebedee, Clarkson University

More articles in Eastern Economic Journal from Eastern Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Victor Matheson, College of the Holy Cross ().