Mmonopolistic competitiononopolistic competition

Mmonopolistic competitiononopolistic competition: Models of Monopolistic Competition

Most products in the world, even standard commodities such as oil and wheat, are naturally differentiated because nature is not uniform. But such generic differentiation is quite different from the economic heterogeneity that arises from a deliberate investment in a location, patent, plant, process, or personnel.Onemust think of the firmas purchasing the differentiation with some sort of investment of fixed resources. This gives rise to monopolistic competition, because other firms can produce a similar or even identical variety at a different location with a high degree of substitution for the original variety. This means that there is free entry but also some degree of monopoly power for each firm. The prototypical example of a differentiated product in international trade is the automobile. Indeed, one can think of the auto industry as monopolistically competitive, with free entry by conglomerate firms such as Toyota, General Motors, Nissan,Mercedes- Benz, and Ford into various segments of the motor vehiclemarket, such as sport utility vehicles and sport cars. Since an aggregation of customers in every country demands all or most of the varieties offered on the world stage, intraindustry international trade is the major consequence. In most advanced countries, intraindustry trade constitutes more than 50 percent of exports and imports.

See also comparative advantage; foreign direct investment under monopolistic competition; gains from trade; New Trade Theory

FURTHER READING

• Chamberlin, Edward H. 1933. The Theory of Monopolistic Competition. Cambridge, MA: Harvard University Press. A detailed study of both cost and demand conditions in both monopolistic competition and oli gopoly.
•  Dixit, Avinash K., and Victor D. Norman. 1980. Theory of International Trade. Cambridge: Cambridge University Press. Applies the theory ofmonopolistic competition to international trade. 
• Dixit, AvinashK., and Joseph Stiglitz. 1977. ‘‘Monopolistic Competition and Optimum Product Diversity.’’ American Economic Review 67 (3): 297 308. This paper rescued the theory of monopolistic competition from irrelevance. 
• Grossman, Gene M., and Elhanan Helpman. 1991. In novation and Growth in the World Economy. Cambridge, MA:MITPress.Applies variousmodels ofmonopolistic competition to the problemof explaining some patterns of economic growth in a global economy. 
• Helpman, Elhanan, and Paul Krugman. 1985. Foreign Trade and Market Structure. Cambridge, MA: MIT Press. Considers the impact of oligopoly and mono polistic competition onthe volume andgains fromtrade. 
• Krugman, Paul R. 1979. ‘‘IncreasingReturns,Monopolistic Competition, and International Trade.’’ Journal of In ternational Economics 9 (4): 469 79. Presents a simple version of the Dixit Stiglitz model of monopolistic competition. 
• . 1981. ‘‘Intraindustry Specialization and the Gains from Trade.’’ Journal of Political Economy 89 (5): 253 66. Applies monopolistic competition to the explana tion of intraindustry trade.
•  Lancaster, Kelvin. 1979. Variety, Equity, and Efficiency: Product Variety in an Industrial Society. New York:Co lumbia University Press, 1979. Applies an innovative theory of product differentiation to the theory of mo nopolistic competition. 
• Robinson, Joan. 1933. The Economics of Imperfect Compe tition. London: Macmillan. Presents all of the geometric tools necessary to explain monopoly, monopolistic competition, and price discrimination. 
• Ruffin, Roy J. 1988. ‘‘The Missing Link: The Ricardian Approach to the Factor Endowments Theory of Trade.’’ American Economic Review 78 (4): 759 72. Shows how the Ricardian theory of international trade can be used to simplify the Heckscher Ohlin theory and the gains from trade.
•  . 1994. ‘‘Endogenous Growth and International Trade.’’ Review of International Economics 2 (1): 27 39. Summarizes the Grossman Helpman model of innova tion and growth in the world economy.

 ROY J . RUFFIN