Excess Capacity in Monopolistic Competition

Posted: 30 Aug 2012

Date Written: 1970


We should first note that if one does not view expenditures on quality, location, or promotion as utility-generating expenditures, misallocation occurs by definition. We will follow Demsetz, however, in proposing that such expenditures, including those on promotion, do in fact generate utility. We want to show that when price and quantity are appropriately measured, contrary to Demsetz's argument, average cost necessarily falls at equilibrium. We will proceed by first showing that for quality-improving costs, if the quantity-price locus has a zero slope at equilibrium the slope is negative at equilibrium for quality-adjusted units. The argument will be extended to cover other types of cost, and it will be shown that regardless of the slope of the quantity-price locus at equilibrium, the slope of the properly measured average cost curve has to be negative.

Suggested Citation

Barzel, Yoram, Excess Capacity in Monopolistic Competition (1970). Journal of Political Economy, Vol. 78, No. 5, 1970, Available at SSRN: https://ssrn.com/abstract=2138580

Yoram Barzel (Contact Author)

University of Washington ( email )

Box 353330
Seattle, WA 98195-3330
United States
206-543-2510 (Phone)
206-685-7477 (Fax)

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