Monopolistic Competition, Nonhomotheticity, and the Stability of the Chamberlinian Tangency Solution.

The focal point in the recent literature on international trade and monopolistic competition is to recast the Chamberlinian partial equilibrium theory in a general equilibrium framework. Using a similar setting, this paper asks whether the Chamberlinian tangency solution is stable under general equilibrium. Paradoxical results follow. When entry occurs, profit per firm can increase and the tangency solution can be unstable. A necessary and sufficient condition for stability is obtained. The concepts of average and marginal factor intensities play an important role in obtaining the stability. Copyright 1990 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.