13.2 Equilibrium under Monopolistic Competition

(A) Chamberlin’s assumptions: Since products are differentiated under monopolistic competition, the demand curve for a firm alters. The price of an individual firm may be higher and its sales larger. All this calls for stiff reaction on the part of other rival firms. Moreover under monopolistic competition there is freedom of entry and the products are close substitutes. All this makes the market situation highly complex through continuous actions and reactions of the firms. In order to simplify the analysis under such a market, Chamberlin has made certain assumptions. Two of these assumptions deserve special reference. Chamberlin has called them Heroic assumptions.

i) Uniformity Assumption: Both demand conditions and cost conditions, and demand and supply curves are uniform throughout the group for all products produced. This ensures that the ability of a firm to influence buyers is not caused by a difference in the demand or cost structures of the firm. The influence of the firm must arise purely out of its ability to differentiate products.

ii) Symmetry Assumption: Any adjustment made in the price or the product by an individual firm spreads its influence over a large number of competitors. The impact of such adjustments is significant. The net effect of these two assumptions is on the demand curve of a product differentiating firm. Before we proceed with equilibrium analysis let us summarize the monopolistic and competitive elements in this market. Chamberlin has called this market one of monopolistic competition because of the blending of the features of both competition and monopoly.

Positive:

It is a competition because of the presence of i) a large number of firms and, ii) freedom of entry

It is a monopoly because each firm has some control over market conditions.

Negative:

It is not a pure competition because i) the products are not homogenous but differentiated and, ii) the Price is not uniform.

It is not a monopoly because the producer is not a single individual. There is no restriction on entry, and the goods are close substitutes.