Book contents
- Frontmatter
- Contents
- List of contributors
- Preface
- 1 Introduction
- Part I Underground classics
- 2 Monopolistic Competition and the Capital Market
- 3 Monopolistic competition and optimum product diversity (May 1974)
- 4 Monopolistic competition and optimum product diversity (February 1975)
- Part II Current Perspectives
- Part III International trade
- Part IV Economic geography
- Part V Economic growth
- Part VI Macroeconomics
- Index
2 - Monopolistic Competition and the Capital Market
Published online by Cambridge University Press: 22 September 2009
- Frontmatter
- Contents
- List of contributors
- Preface
- 1 Introduction
- Part I Underground classics
- 2 Monopolistic Competition and the Capital Market
- 3 Monopolistic competition and optimum product diversity (May 1974)
- 4 Monopolistic competition and optimum product diversity (February 1975)
- Part II Current Perspectives
- Part III International trade
- Part IV Economic geography
- Part V Economic growth
- Part VI Macroeconomics
- Index
Summary
Introduction
It is often suggested that the market for shares in firms is one of the more competitive markets. There are a large number of buyers and sellers, and for most widely held firms – most of the largest firms in the USA – no single individual owns more than a few per cent of the shares. Moreover, shares in one firm are closely competitive with shares in other firms.
On the other hand, it is often alleged that if a firm were to increase its issue of shares, it would face a downward sloping demand schedule for its shares.
If the former view were correct, then a security which was uncorrelated with the business cycle, should be treated as essentially a safe security, and a firm, in evaluating a project, should ignore the variance of the project, and be concerned only with its correlation with the business cycle. There is a widespread view that this is in fact not the case.
These contrasting views would be resolved if the capital market were monopolistically competitive rather than perfectly competitive: different securities are close but not perfect substitutes for one another.
If different risky securities are not perfectly correlated, then they are imperfect substitutes for one another (in the absence of a full set of Arrow–Debreu securities).
- Type
- Chapter
- Information
- The Monopolistic Competition Revolution in Retrospect , pp. 49 - 69Publisher: Cambridge University PressPrint publication year: 2001