Baumol on Excess Capacity

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Professor Baumol is mostly credited for his study of contestable markets as markets enjoying monopoly power which could potentially turn into competitive ones due to the lack of sunk costs and entry or exit barriers. We reveal Baumol’s view of the welfare aspects of monopolistic competition. Discussing the so called “excess capacity theorem,” formulated by Robinson and Chamberlin, and basing his analysis on Machlup’s writings, Baumol justifies competition on account of the nonexistence of excess capacity. This reveals Baumol as a true proponent of competition.
Keywords: William Baumol, monopolistic competition, excess capacity, competition
JEL codes: B21, B31, D41, D43

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