Introduction

In our analysis in chapter 2 we dealt with goods that could be defined in terms of a small number of characteristics. The implication of this was that we could easily think of goods as being close or distant neighbours to one another and hence, for some particular consumer, being good or bad substitutes. In chapter 1 we referred to this general phenomenon as preference asymmetry. It implies that any particular firm only faces localised competition from firms producing goods that are its near neighbours in the characteristics space.

The aim of this chapter is to study equilibria in imperfect markets in which consumers are taken to have symmetric preferences. That is to say, any one brand is an equally good substitute for any other. There are various ways in which this can be made precise but for this chapter the way we shall do it is by assuming that there exists a ‘representative consumer’ with a taste for every brand on offer. The consumer's actual choice will depend on income and relative prices, but all goods are equally possible candidates ex ante for inclusion in the consumer's shopping basket.

Edwin Chamberlin (1933) was the first to study such markets and to refer to it as monopolistic competition. Since Chamberlin's book a substantial literature has developed in the area but not all of it is genuinely about monopolistically competitive markets nor does it all use the idea of the representative consumer.