Introduction

As many have noted, following Chamberlin's (1933) classic work on the subject, monopolistic competition had a peculiar relationship to economic theory and research: widely recognised as important and featured in undergraduate treatments of industrial organisation (along with monopoly, oligopoly and perfect competition), but never quite becoming a central part of the discourse of mainline economic theory. The fundamental contributions of A. Michael Spence (1976) and Avinash Dixit and Joseph Stiglitz (1977) changed this situation completely. With a tractable model capturing the essential elements of Chamberlin's analysis, monopolistic competition moved right to the centre of research on a wide range of economic topics. Most of this volume celebrates this essential contribution. In this chapter we focus on an additional contribution of a very similar sort. A good bit further back than Chamberlin, Adam Smith analysed the way in which the division of labour is limited by the extent of the market. As with monopolistic competition, this notion was widely referred to and recognised as somehow important, but was never integrated into economic theory or research in a serious way. Wilfred Ethier (1982a) recognised that if Dixit and Stiglitz's formal structure was interpreted as a formal representation of the supply side of the economy, a tractable representation of division of labour, limited by the extent of the market, was readily at hand.