(Criticism of) Criticisms of the Theory of Monopolistic Competition
Under a heading entitled “Criticisms of the Theory of Monopolistic Competition” in Edwin Mansfield’s Microeconomics: Theory and Applications, Mansfield introduces “a number of important criticisms” made of Chamberlin’s theory, mostly those made by (the previously cited Nobel prize winner) George Stigler.
For example, Chicago’s George Stigler and others have argued that the definition of the group of firms included in the product group is extremely ambiguous. It may contain only one firm or all of the firms in the economy. Moreover, in Stigler’s view, the concept of the group is not salvaged by the assumption that each firm neglects the effects of its decisions on other firms in the group, and that each firm has essentially the same demand and cost curves. (Mansfield 329)
Mansfield goes on to reaffirm Stigler’s view that the assumption of similar demand and cost curves for all firms in the group must mean that the products sold by these firms are homogeneous. His only argument against this view is the weak case declaring that if the products are homogeneous, the firms’ demand curves wouldn’t need to always slope downward.
Both writers may have been too focused on technicalities to appreciate Chamberlin’s larger theory. Chamberlin assumed similar demand and cost curves for each firm, which Stigler and Mansfield find impossible when applied to a market for differentiated products. However, given some easily achievable conditions, those demand and cost curves could be perfectly alike for all firms in real life:
• (1) Long-run equilibrium price has been achieved in ALL industries whose services or products are necessary inputs for the kind of product produced by the monopolistically competitive market. This can be achieved in the short run if those inputs are all produced by monopolies.
• (2) All consumers considered in the demand curves are individuals who will buy at least the market’s equilibrium quantity of the products offered by the market, regardless of its cost or quality; so typical competition against other firms is the only way a firm can influence whether those consumers buy x quantity from them.
While demand curves tend to be more complicated issues, as no linear equation can account for the unavoidable erraticism of real people, the two complicated demand curves of monopolistic competition can be simplified using the trick often presented to beginning economics students: converting an entire base of potential customers to a single, “average” consumer. When we reconsider the market through the eyes of that one representative consumer, it is easier to see how easily (2) can be achieved.
The only legitimate factor differentiating monopolistic competition from perfect competition is perfect competition’s homogeneity of products. Perfect competition is implausible, but imperfect—or monopolistic—competition is the ideal market structure that has already been implemented in most electronic and/or artistic markets. The “theory of monopolistic competition” is, like those of evolution and the Big Bang, not “just a theory”; it is, rather, a theoretical fact as well as the current term for the goal of classical capitalism. Imagine a market structure in which businesses compete to sell products and, in addition to lowering prices, they also alter the quality of their products (which, due to perfect homogeneity, could not be done in a perfectly competitive market). As a result, consumers may buy products which are better as well as cheaper. Opposition to that utopian theory is usually unheard of.
Noting the plausibility of monopolistic competition proved above, Mansfield’s next declaration seems ridiculous: “Still other economists claim that there are relatively few markets in the real world where the model of monopolistic competition is really relevant.” (Mansfield 329)