Criticism of monopolistic competition:

The model of monopolistic competition was received very enthusiastically and many economists termed it as "Chamberlin revolution" but there were several serious attacks on this model  The downward sloping demand curves are derived from the assumption of product differentiation. This is inconsistent with the assumption that cost curves or demand conditions are the same for all the firms. If the output of two firms is genuinely different, then the cost per unit of output is not really comparable. Furthermore, the long run equilibrium of a firm with only normal profit is logically incorrect. If the firm is providing a unique product and making supernormal profits as a consequence, other firms can compete away these profits only by providing the same product.

Another problem created by the introduction of product differentiation is the difficulty to define the industry or the product group, e.g., tea, coffee, soft drinks, beer, wine and liquor could form a product group according to somebody but some others may reject. Thus, in monopolistic competition it is not very clear where do we draw the line.

Finally, differentiated products are not produced by different firms. One single firm may produce several differentiated products, which are close substitutes of each other. The monopolistic competition market structure is not useful for making any prediction. Unlike the theories of perfect competition and monopoly, it does not provide unambiguous predictions of the effect of changes in costs or demand on the price of the product, size of the plant and the number of firms operating in the industry.

All these discussions on monopolistic competition, however, do not mean that it has been useless. For, it did raise a lot of issues previously overlooked which prompted literature of selling costs, advertising, non price competition etc.