Edward Hastings Chamberlin (b.

1899) in 1933 published The Theory of Monopolisti c Competition as a reorientation of the theory of value, designed to base it on a synthesis of monopolistic and competitive theories. He argues that the old ide a of monopoly and competition as alternative is wrong; and that most situations are composites in which elements of both monopoly and competition are combined. But he asserts that the correct procedure is to start from the theory of monopol y. This, he thinks, has the merit of eliminating none of the competitive element s, since these operate through the demand for the monopolist's product; while on the contrary the alternative assumption of competition rules out the monopoly e lements. Thus, in taking monopoly as a starting point, Chamberlin's approach is similar t o that of Cournot. But, while with Cournot the transition to perfect competition takes place only o n a scale of numbers of competitors, with Chamberlin it takes place also on a sc ale of substitution of products. Any producer whose product is significantly dif ferent from the products of others has some monopoly of it, subject to the compe tition of substitutes. He considers each producer in an industry as having some monopoly in his own product. If he be the sole seller of a unique product, he ha s a pure monopoly.1 If there be two sellers of similar products, the situation i s one of "duopoly." If there be several, an "oligopoly" exists. The condition ma y range through various degrees of oligopoly to pure competition, under which th ere are so many sellers of a highly standardized product that any one could sell all his product without affecting the demand. Pure competition is found only un der the dual condition of (a) a large number, and (b) a perfectly standardized p roduct. The usual condition Chamberlin considers to be in the intermediate area, in which some element of "monopoly" exists, and which he calls "monopolistic co mpetition." Economic inertia and friction are "imperfections" which he does not consider as part of "monopolistic competition." Thus Chamberlin's thought centers on the product. Each producer, under "monopoli stic competition," faces competition from "substitute" products which are not id entical and which are sold by other concerns with various price policies, and sa les expenses. These merely limit his "monopoly" of his own product. The individual demand curve (or sales) for one seller's product is then regarded as affected by the market policies of other individual sellers whose products a re partial substitutes. Total sales of the partly competing group of substitute products are treated as limiting the sales of the product of any one seller. Und er "pure" competition (many sellers and a completely standardized product) a hor izontal demand curve (average revenue) would exist for each individual competito r's product. This would mean identical prices. Chamberlin argues that "pure" com petition would force all individual competitors to treat differential advantages , or rents, as costs, the same as other costs. Chamberlin emphasizes the effect of judgments by one seller concerning his rival s' policies, possible retaliation, etc. He also argues that selling costs such a s advertising are not part of the cost of production, but are incurred to increa se the sales of the given product; and thus they affect the demand curve. Throug hout, his basic idea is that, no matter how slight, any differentiation of a sel ler's product gives him to that extent a monopoly. And all these conditions, com monly found in competitive markets, are either "impurities" in the nature of mon opoly elements, or are associated with such elements. They make "pure" competiti on impossible. To Chamberlin, actual "competition"1 includes the effort of competitors to incre ase their monopoly powers.

And the essence of "monopoly," and therefore of "monopolistic competition," is s een as lying in differences (1) differences in price policy, (2) differences in nature of product, and (3) differences in such sales effort as advertising outla ys. It is a contribution of Chamberlin's to have developed the second and third of these variables as arising out of the mixture of monopoly and competition. Chamberlin starts with a single firm and develops the idea of monopoly price and competitive prices as determined by the intersection of revenue or sales curves with expense curves. Either the marginal revenue curve, or the average revenue curve (from which it is derived), may be used to determine the monopoly output a nd price, the former by intersecting the rising marginal cost curve, the latter by the familiar Marshallian method of fitting the maximum profit area between it and the average cost curve, which includes rents or differentials and thus equa ls the average price.