Do Competition and Monopolistic Competition Differ?
Author(s): Harold Demsetz
Source: The Journal of Political Economy, Vol. 76, No. 1 (Jan. - Feb., 1968), pp. 146-148
Published by: The University of Chicago Press
Stable URL: http://www.jstor.org/stable/1830735
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Do Competition and Monopolistic
Competition Differ?
HaroldDemsetz
University
of Chicago
(Demsetz,
In twoearlierpaperson thesubjectofmonopolisticcompetition
thatiftherelevantaveragerevenueand aver1959,1964),I demonstrated
age cost paths are constructed,in the sense that cost and revenueare
from
levelsat outputratesthatdiffer
allowedto take theirmostprofitable
output rate, then the excess-capacitytheoremof
the profit-maximizing
theoryis false; ifthefirmis allowed to varyall
monopolistic-competition
inputswhenproducingvariousoutputrates,equilibriumat thelow point
of therelevantaveragecostcurveis consistentwithmonopolisticcompetithepossibilityof
tion.In thesecondpaper,I thenwenton to demonstrate
model
comparativestaticsusingthemonopolistic-competition
meaningful
plus some additionalassumptions;the comparativestaticsexaminedin
thatpaper are consistentwiththe competitivemodel. The net effectis a
that monopolisticcompetitioncan be viewedas the ecodemonstration
nomic equivalentof competitionfor analyticalpurposes.But if monopolisticcompetitionand competitionare reallythe same,it also should be
The purposeof
possibleto viewcompetitionas monopolisticcompetition.
of thispossibility.
demonstration
thisnoteis to givean affirmative
equiI shall firstconsiderthe Chamberlinmonopolistic-competition
how easy it is to
case and thendemonstrate
libriumin thelarge-numbers
viewa competitive
firm,in a relevantway,in thesame typeof equilibrium
To thisend, let us considerFigure 1, which portraysthe
construction.
equilibrium.The APC curve reChamberlinmonopolistic-competition
presentsaverage"production"costs.The FF' curveis averageproduction
costsplus averagesellingcost; thesellingcostincludedin FF' is constant,
levelforproducingand sellingoutput
beingfixedat itsprofit-maximizing
rate Q'. Thus, FF' holds sellingcost constantand considersthe sale
of outputrates otherthan Q' by means of price adjustmentsalong dd'.
Sellingcost is givenin total by the area p'xyz. This is the pictureof the
Chamberlinmonopolistic-competition
equilibriumthat has led to the
assertion.
excess-capacity
146
DO COMPETITION
AND MONOPOLISTIC
COMPETITION
DIFFER?
147
$IQ
F
i~~~~~~~~~~~~~~~~~~'_
Iy
~
0
~
I
Q
~
~
~
P
~~~~~~Q
FIG. 1
Considernow a competitive
firmthatsells,let us say,radios.Let Q' be
thisfirm'sprofit-maximizing
outputrate and let p'xyz measureits total
expenditureson copper when this output rate is produced; APC now
measuresthisfirm'sexpenditures
on inputsotherthancopper.If we hold
this firm'scopper expendituresconstantat p'xyz and examine what
happenswhenoutputratesdifferent
fromQ' are produced,we findthat,
under reasonable assumptionsabout product quality, the price path
traced out will be dd'. As the firmproduces largeroutput rates, the
qualityof itsproductwillbe reducedbytheuse of less copperperradio; it
be forcedto accept the prevailinglower price for lesserwill,therefore,
qualityradios,so thatlargeroutputrateswill fetchlowerprices.As the
firmproducessmalleroutputrates,the qualityof its productwill be no
lower(it can throwaway unwantedcopper) and probablywill be higher;
henceit can fetcha higherpriceforsmalleroutputrates.If thefirmis in
competitive
equilibriumat outputrate Q', it mustbe truethatthe price
is tangentto FF', for
path tracedout withconstantcopper expenditures
otherwisethe first-order
conditions for profitmaximizationwill be
violated.
148
JOURNAL OF POLITICAL
ECONOMY
and monopolistic-competiThe onlydifference
betweenthecompetitive
tion cases is the substitutionof the words "selling cost" for "copper
expenditures."The two cases are the same forall analyticalpurposes.If
contentor the"desirability"
sellingcost is heldconstant,theinformation
of what is being sold will diminishas outputis increased.This fall in
qualityis analyticallythe same as that producedby holdingcopper expendituresfixed.If all costs are allowed to adjust optimallyas output
changes,thereis no need forexcesscapacityin eithercase; in bothcases,
on sellingcost
thefirmsmayfindit desirableto expandtheirexpenditures
or copperas outputincreases,so thatpricesneednot fall.
one input from
If there is no analyticalreason for distinguishing
a locus of points
another,thereis no reasonto supposethatdd' represents
on a givendemandcurve.Arbitrarily
fixingthe quantityof promotional
quality-enhancing,
etc., inputs is no different
(information-producing),
fromfixingthequantityof copperinput.Both typesof constraintforcea
changein the natureof the product,so that the horizontalaxis can no
longerbe countedupon to measurethesame productas outputis changed.
be used to judge efficiency.
The dd' curvecannot,therefore,
The issue is not monopolisticcompetitionversuscompetition.It is the
of laws such as thosethatpreventimitationof brand names,
desirability
productdesign,etc.; and, perhaps,thereis also a question about the
ofexpenditures
on certaintypesofinputs.One can argueforor
desirability
against on these issues withoutinvokingthe monopolistic-competition
is costlyby
in a worldin whichinformation
model.But to judge efficiency
is freeis as sillyas comusingas a norma model in whichinformation
paringequilibriumin a worldin whichcopperis costlywithequilibriumin
a modelin whichcopperis free.
References
Demsetz, H. " The Nature of Equilibrium in Monopolistic Competition,"
J.P.E., LXVII, No. 1 (February, 1959), 21-30.
" The Welfare and Empirical Implications of Monopolistic Competition,"Econ. J. (September,1964).