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What is meant by monopolistic competition? Explain and critically analyse Chamberlin's theory of monopolistic competition.

Pure monopoly and perfect competition are two extreme cases of market structure. In reality, there are markets having large number of producers competing with each other in order to sell their product in the market. Thus, there is monopoly on one hand and perfect competition on other hand. Such a mixture of monopoly and perfect competition is called as monopolistic competition. It is a case of imperfect competition.

The conclusion is drawn after analysing Chamberlin's theory of monopolistic competition that under monopolistic competition the equilibrium price is higher, and the volume of output prob­ably (not necessarily) lower, than under pure competition. The net profits of enterprise, however, may or may not be higher than under pure competition because of the expense which is required to maintain the monopoly elements and which is often increased by a multiplication of substitute products surrounding the monopolist. Chamberlin argues that monopolistic competition need not bring higher profits to the marginal firm in a given industry. Instead it may allow the existence of a larger number of firms making normal profits.

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