ABSTRACT
This chapter delineates a series of descriptive concepts that are designed to deal with the phenomena of monopolistic competition and the interdependencies which second best theory has emphasised. More specifically, it develops four different sets of concepts that focus respectively on various subcomponents of a firm's (P-MC) gap, various factors that influence the intensity of quality-or-variety-increasing (QV) investment competition, various types of QV investment misallocation, and the various distortions that can lead firms to make allocatively inefficient decisions. The chapter provides a justification for these concepts by suggesting various reasons why they divide up the world in a more useful way than their conventional alternatives. It explains how this approach facilitates the identification and analysis of important new problems as well as the analysis of other problems that already have been defined. The distinction between price and QV investment competition is also helpful for a number of purposes other than predicting the competitive impact of some event or policy.
