In two earlier papers on the subject of monopolistic competition (Demsetz,. 1959,
1964), I demonstrated that if the relevant average revenue and aver- age cost ...
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 Accessed: 25/08/2010 19:06 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at http://www.jstor.org/action/showPublisher?publisherCode=ucpress. Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact
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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).
