This paper argues that product differentiation is compatible with perfect competition under free entry and exit and small firm size relative to size of market. Despite Chamberlin’s view, monopolistic competitors are price takers, even though each firm’s product has no perfect substitute. There is a difference between perfect competition with product homogeneity and perfect competition with differentiated products, however. Advertising can pay off with differentiated products because products have separate identities—and price depends on quality—even though firms are price takers for any given quality. A differentiated oligopoly may resemble monopolistic competition a la Chamberlin in some ways.

Additional Metadata
Keywords Monopolistic Competition, Perfect Competition, Product Differentiation
JEL Perfect Competition (jel D41), Oligopoly and Other Forms of Market Imperfection (jel D43)
Publisher Department of Economics
Series Carleton Economic Papers (CEP)
Citation
Carson, R. L. (2018). Product Differentiation and Demand Elasticity (No. CEP 18-12). Carleton Economic Papers (CEP). Department of Economics.