Monopolistic Competition Theory: Origins, Results, and Implications.

• Author: Stewart, John F.

Keppler provides a worthwhile historical view of the rise and fall of monopolistic competition as a dominant element of microtheory that will be useful to scholars in the field of the history of economic thought but also provides interesting reading for economists who specialize in economic theory and industrial organization. Economists often seem to view the current orthodox theory as devoid of the worldly factors that resulted in its creation. Keppler builds a carefully crafted case that the nature of any theory and its ultimate fate depend heavily on the faults and failures of its predecessors, the social, political, and intellectual environment at the time of its emergence, and the personalities of the principals in the academic process.

While to many of us the theory of monopolist competition is a mildly interesting side trip of one or two lectures in the teaching of intermediate price theory, at the peak of its influence in the 1930s it was viewed as a necessary replacement of the corner stone of Marshallian microeconomics, the competitive market. Keppler traces the origins of the monopolistic competition theory to a conflict between the empirical reality of increasing returns at the firm level and the theoretical impossibility of competitive equilibrium under such circumstances within the Marshallian framework; or more precisely, the rejection of the contemporary attempts to resolve the dilemma. On this point, Keppler provides a detailed analysis of the work done in the 1920's by Piero Sraffa, Allyn Young and others. Keppler provides further insight into the intellectual debate through reference to the economic and political realities of the time. The failure of laissez faire capitalism to provide macro stability in the period of the 1920s and 1930s in both Europe and the United States brought with it serious doubts that the observed behavior of markets was consistent with a Marshallian framework of perfect competition. This view was reinforced by the increasing domination of western economies by large corporations that bore little practical resemblance to the perfectly competitive entrepreneurial firm. Politically, the economic instability had led toward greater pressure for government intervention in markets. Though policy direction differed dramatically across country, there was a general intellectual desire to create a theoretical apparatus that would embody greater realism in its portrayal of the industrial organization of the...