The concept of monopolistic competition put forth by E.H. Chamberlin was more realistic than either perfect competition or pure monopoly. Before Chamberlin, monopoly and competition were regarded as two alternative market structures, one would be absent when the other exists. On the other’hand, according to Chamberlin, in most of the real world economic situations, both monopoly and competitive elemehts are present.
Chamberlin’s concept of monopolistic competition is thus, a blending of competition and monopoly. The difference between short-run and long-run in a monopolistic competitive market is that in the long-term, new companies can enter the market, since as companies are making positive economic benefits, while in the short-run, new companies will be attracted to these benefits and they will opt to enter the market. Unlike a monopoly market, no barrier to entry is present in a monopolistic competitive market. Therefore, it is easy for new companies to enter the market in the long run.
The monopolistically competitive firm’s long-run equilibrium situation is illustrated in the figure below :
Long run profit maximization by a monopolistically competitive firm. The entry of new companies increases the supply of differentiated products, from which the market demand curve of the firm is shifted to the left. As the market increases, the firm’s demand curve will continue to move towards the left, as long as it is not tangent compared to the average total cost curve at the maximum level of profit compared to the figure shown in the figure. At this time, the firm’s financial profits are zero, and there is no incentive to enter the market for new firms now. Thus, in the long run, the competition coming from the entry of new companies can become a cause of general profit for each company in a monopolistic competitive market, exactly like a perfectly competitive firm.
