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2.2 CHAMBERLIN’S MODEL (LARGE GROUP), , As stated earlier, ‘Group’ refers to the collection of firms that, produce closely related but not exactly identical products. since the, firms in a group produce substitutes and not ho9mogenous, products, the demand for the product of one producer is dependent, on the price and nature of the products of his rivals. Basic, assumptions of the Chamberlin’s large group model are as follows., , 1. There are large number of buyers and sellers in a group., , The products of each firm are differentiated but still they are, close substitutes of each other., , There is free entry and exit in a group., , Profit maximisation is an important objective of a firm, , The prices of factors of production are given., , Demand and cost curves for all products in a group are uniform., , N, , aS &, , Chamberlin's has accepted traditional cost concepts for his, analysis. So the average variable cost (AVC), Marginal cost (MC), and Average Total Cost (ATC), all are U shaped in nature. He, introduced the concept of selling cost for the first time in his, analysis. Because each firm produces differentiated products,, advertising and selling costs play important role in these markets., Selling cost curve is also assumed to be U-shaped in nature., , Product differentiation established by advertising, packaging,, differences in design, etc. give some monopoly power to each, producer. So the producer is not price - taken and he enjoys some, degree of power in determining price.
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Due to product differentiation, it is difficult to get market, demand and supply. Summation of individual demand and cost, curves to form ‘Group’ demand and supply requires the use of, some common denominator. This compels the ‘Group’ not to have, unique equilibrium price, , 2.2.1 Equilibrium of the firm, , The firm has negatively sloped demand curve. It implies that, if the firm raises price, it will lose some of its market share. although, it has downward sloping, demand curve, it is highly elastic in nature, as shown in the following diagram., , Pp, , Price wa, , x, Fig. 2.1, , Firm, in the short run, acts as a monopolis and given its, demand and cost curves, it maximizes its profit at the point where, MC = MR. But to be able to understand the equilibrium of an, industry, Chamberlin has developed three models., , Model 1- — Equilibrium with new firms entering into industry., Model 2- = Equilibrium with price competition, Model 3- = Equilibrium with price competition and free entry., , 2.2.2 Model 1. Equilibrium with new firms entering the, industry., , In this model, Chamberlin assumed that the firms are in, equilibrium with excess profit (in the short run) and hence, there, new firms can enter the market in the long run. Following diagram, shows equilibrium of a firm and industry in the same diagram.
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LAC & LMC - Long run average cost and long run marginal cost, curves., , dd’ - demand curve of a firm., , Pu - equilibrium price (corresponding to MR = MC) - students, should recollect the determination of equilibrium price and quantity, with MC - MR approach)., , ABCPy - Excess profit enjoyed by the firms in the short - run., , Excess profit situation leads to entry of new firms into the, market. As a result the demand curve for the firm will shift, downwards (since there are more sellers in the market now, the, share of each firm in catering total demand will come down)., , Dede’ - New demand curve, MRz - Corresponding marginal revenue., Pe - Equilibrium price (where MC = MR), , At this price, excess profits are wiped off and firms are in, stable equilibrium with normal profit., , 2.2.3 Model 2. Equilibrium with price competition :, , This model is based on the assumption that the number of, firms in an industry is exactly compatible with long-run equilibrium, but the existing price charged by the firms is higher than the, equilibrium price. The firms charge price not as a reaction to their, competitors, but each firm fixes price independently with an, objective of profit maximisation. If a firm aims at reducing the price, to increase its sales, it can not enjoy fullest possible benefit of price, reduction because; all other competition firms would reduce their, price and expand their own sales simultaneously. Hence, even if
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price reduction takes place, the share of all the finns remain more, or less constant. In this model, the firms are shown to be suffering, from myopia. They do not learn from experience and continue to, lower price to increase sales. There is a discrepancy between, expected sales (after price reduction) and actual sales because all, firms act identically. The adjustment process will stop at point, where the demand curve is tangent to the average cost curve. That, means a point at which a firm enjoys normal profit., , 2.2.4 Model 3 : Price Competition and free entry :, , In this model, Chamberlin shows how the actual life, equilibrium is achieved by both price competition and free entry., According to him price adjustment by the existing firms and entry of, new firms together would work towards stable equilibrium., , Chamberiin's theory is criticized on many grounds. It is said, that the firms having competitors who produce substitutes, can not, act independently as assumed in this model. Firms will learn from, the past experiences or mistakes and then take decisions regarding, price and quantity. Further, it is difficult to define the concept of, industry with product differentiation. Two different products can not, form an industry. So some of the assumptions of Chamberlin seen, to be unrealistic. Thirdly, some people have criticized the model on, the ground that it is indeterminate. Effects of product changes and, sales. Promotion activity create a situation of indeterminate, equilibrium.
