THE EXCESS CAPACITY CONTROVERSY: A CRITIQUE OF RECENT CRITICISM

In 1959, Demsetz reformulated Chamberlin's (1956) economic model of monopolistic competition in such a way as to contradict Chamberlin's excess capacity theorem. In 1970, Barzel criticized Demsetz's conclusions concerning excess capacity. Several recent papers have revived the monopolistic competition model without addressing the excess capacity issue. However, both Ohta (1977) and Murphy (1978) try to reestablish Demsetz's excess capacity result directly, and the work of Greenhut (1974) tries to discredit the excess capacity theorem in the context of a different model. It is shown that these 3 efforts to reestablish the contradiction of the excess capacity theorem are flawed. Ohta and Murphy suffer from confusion over the definition of quality, while Greenhut's research is troubled on a number of grounds. In particular, it seems unreasonable that long-run equilibria would involve companies taking advice that was reliably against their interests. Though Barzel's critique is accepted here, the analysis avoids the confusion over product quality that has obscured the issue for both Barzel and his critics.