Since late 1920s and early 1930s, economists are aware of the limitations of competition and monopoly analyses, and from that time on, they turned their attention to the middle ground between monopoly and perfect competition.
But the situations that did not seem to fit the models of monopoly or perfect competition, could be explained often with the broad class of oligopoly models. That is why the model of monopolistic competition has not played yet a very central role in economic analysis.
On the contrary, the model has been strongly criticised on theoretical grounds. Prof. Stigler has raised objections to Chamberlin’s definition of the product-group. He has argued that every product has many close substitutes that do not constitute a product-group in Chamberlin’s sense. Stigler has given the example of housing facilities that may range from incredible estates to unbelievable slums.
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Second, Prof. Harrod finds it inconsistent that the firm equates long-run marginal cost and short-run marginal revenue to determine the equilibrium output. He argues that if long-run marginal revenue curve were used, the output of the firm would have been greater, because the long-run demand curve is supposed to be more elastic.
Lastly, and very importantly, Cohen and Cyert have raised objections to the behavioural assumption in Chamberlin’s model that the firms do not eventually learn that their actions induce predictable reactions from other firms.
They correctly argue that the firms cannot continue to believe that the perceived demand curve provides real price-output opportunities even when they continually find that things are not going their way. If the firms do learn from experience then they would no longer be guided by Chamberlin’s model, rather, they would look forward to a model of monopoly, oligopoly, or perfect competition.
Perhaps these are the reasons for which the economists did not find the Chamberlin model to be much helpful in the analysis of markets. Although some of the assumptions of the model appeared to be realistic, the model suffers from too many loose ends to be of much practical use.