Introduction

My opening quotation, taken from a Festschrift for E. H. Chamberlin, is almost as close in time to us as it is to Chamberlin's pioneering Theory of Monopolistic Competition (1933). Yet it belongs to a bygone era. The theory of monopolistic competition has had a huge impact on modern trade theory, and no serious student of the subject can afford to neglect its many applications. Nor is any student likely to be allowed to neglect them. It is even rumoured that there are universities where the graduate trade curriculum covers nothing but monopolistic competition!

One development above all others is responsible for this shift: the publication in 1977 of Avinash Dixit and Joe Stiglitz's paper which introduced an elegant, parsimonious and tractable formalisation of the Chamberlinian model. Dixit and Stiglitz themselves (hereafter, ‘DS’) applied their innovation only to the classic issue in industrial organisation of whether monopolistically competitive industries would yield an optimal level of product diversity. But within a few years, a sizeable literature had already developed applying their approach to international trade. The DS approach provided a framework for modelling some distinctive features of contemporary international trade, especially trade in manufactured goods between developed countries, which traditional competitive models failed to capture. Above all, it allowed consideration of the implications of increasing returns to scale and product differentiation in general equilibrium.