Imperfect Competition and Monopolistic Competition

During in 1933 Edward H. Chamberlin [1899-1967] and Joan Robinson [1903-1983]independently published similar theories on “monopolistic” and “imperfect”competition. The terms “monopolistic competition” and “imperfect competition”originally were basically the same even though there were subtle differences.Currently, the use of “imperfect competition” is more generic, it refers to allmarket structures that lie between pure competition and monopoly. In thisusage monopolistically competitive and oligopolistic markets are consideredimperfect.

Monopolistically competitive markets are characterized by;

• a large number of sellers, no one of which can influence the market,

• differentiated products,

• relative free entry and exit from the market.

Relaxing the characteristic of outputs from homogeneous to “differentiated products” was the basic change from the purely competitive market model. The differentiation of output results in the demand faced by each seller being less than perfectly elastic. Since there are “many sellers,” many substitutes for each seller’s output is implied. This suggests that the demand faced by a firm in a monopolistically competitive market is likely more elastic than in a monopoly. The elasticity obviously depends on the preferences and behavior of the buyers. The negative slope of a firm’s demand function in imperfect competition results in a different result than in pure competition.

The conditions of entry and exit to and from a monopolistically competitive market are similar to the purely competitive market; there are no major BTE. Entry and exit are relatively easy. The relative ease of entry/exit makes the long run results of an imperfectly competitive market different from a monopoly.

P_x economic profit