Chamberlin's Group Equilibrium: Concept and Theory

Chamberlin’s Group
Equilibrium: Concept and

Theory
In this article we will discuss about Chamberlin’s Group
Equilibrium. After reading this article you will learn
about: 1. Concept of Industry and Group 2. Theory of
Group Equilibrium 3. Assumptions 4. Explanation.
Concept of Industry and Group:
Group equilibrium relates to the equilibrium of the “industry”

under a monopolistic competitive market. The word “industry”
refers to all the firms producing a homogeneous product. But under
monopolistic competition the product is differentiated.
Therefore, there is no “industry” but only a “group” of firms

producing a similar product. Each firm produces a distinct product
and is itself an industry. Chamberlin lumps together firms
producing very closely related products and calls them product
groups.
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So in defining an industry, Chamberlin lumps together firms in such

product groups as cars, cigarettes, breweries, etc. According to
Chamberlin, “Each producer within the group is a monopolist, yet
his market is interwoven with those of his competitors, and he is no
longer to be isolated from them.”
In the product group, the demand for each product has high cross
elasticity so that when the price of other products in the group
changes, it shifts the demand curve.
Theory of Group Equilibrium:

Chamberlin develops his theory of long-run group equilibrium by
means of two demand curves DD and dd, as shown in Figure 3. The
demand curve facing the group is DD. it is drawn on the assumption
that all firms charge the same price and are of equal size, dd
represents an individual firm’s demand curve.
The two demand curves reflect the alternatives that face the firm
when it changes its price. In the figure, the firm is selling OQ output
at OP price. As a member of the group with product differentiation,
the firm can increase its sales by reducing its price for two reasons.
First, because it feels that the other firms will not reduce their
prices; and second, it will attract some of their customers. On the
other hand, if it increases its price above OP, its sales will be re-
duced because the other firms in the group will not follow it in
increasing their prices and it will also lose some of its customers to
the others.
Thus the firm faces the more elastic demand curve dd. But if all
firms in the product group reduce (or increase) their prices
simultaneously, the firm will face the less elastic demand curve DD.
Assumptions of Chamberlin’s Group Equilibrium:

Prof. Chamberlin’s group equilibrium analysis is based on
the following assumptions:
(1) The number of firms is large.
(2) Each firm produces a differentiated product which is a close

substitute for the other’s product.
(3) There are a large number of buyers.

(4) Each firm has an independent price policy and faces a fairly
elastic demand curve, at the same time expecting its rivals not to
take any notice of its actions.
(5) Each firm knows its demand and cost curves.
(6) Factor prices remain constant.
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(7) Technology is constant.
(8) Each firm aims at profit maximisation both in the short-run and
the long- run.
(9) Any adjustment of price by a single firm produces its effect on

the entire group so that the impact felt by any one firm is negligible.
This is the symmetry assumption.
(10) As put forth by Chamberlin, there is the “heroic assumption”

that both demand and cost curves for all the ‘products’ are uniform
throughout the group. This is the uniformity assumption.
(11) It relates to the long-run.
(12) No new firm can enter the group.
Explanation of Chamberlin’s Group Equilibrium:

Given these assumptions and the two types of demand curves DD
and dd, Chamberlin explains the group equilibrium of firms. He
does not draw the MR curves corresponding to these demand
curves and the LMC curve to the LAC curve to simplify the analysis.
Figure 4 represents the long-run equilibrium of the group under

monopolistic competition. Adjustment of long-run equilibrium
starts from point A where dd and DD curves intersect each other so
that QA is the short-run equilibrium price level at which each firm
sells OQ quantities of the product. At this price- output level, each
firm earns PABC super-normal profits.
Regarding dd as its own demand curve each firm applies a price cut
for the purpose of increasing its sales and profits on the assumption
that other firms will not react to its action. But instead of increasing
its quantity demanded on the dd curve, each firm moves along the
DD curve.
In fact, every producer thinks and acts alike so that the dd

curve“slides downward” along the DD curve. This downward
movement continues until it takes the shape of the d1d1 curve and is
tangent to the LAC curve at A1.
This is the long- run group equilibrium position where each firm
would be earning only normal profits by selling OQ1 quantities at
Q1A1 price. If the d1d1 curve slides below the LAC curve, each firm
would be incurring losses (not shown in the figure to keep the
analysis simple).
Such a situation cannot continue in the long-run and price would
have to be raised to the level of A1 to eliminate losses. Thus each
firm will be of the optimum size and operate the optimum scale
plant represented by the LAC curve and produce ideal or optimum
output OQ1.

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Chamberlin’s Group

Equilibrium: Concept and

Group equilibrium relates to the equilibrium of the “industry”

Therefore, there is no “industry” but only a “group” of firms

So in defining an industry, Chamberlin lumps together firms in such

Theory of Group Equilibrium:

Assumptions of Chamberlin’s Group Equilibrium:

(2) Each firm produces a differentiated product which is a close

(3) There are a large number of buyers.

(5) Each firm knows its demand and cost curves.

(6) Factor prices remain constant.

(7) Technology is constant.

(9) Any adjustment of price by a single firm produces its effect on

(10) As put forth by Chamberlin, there is the “heroic assumption”

(11) It relates to the long-run.

(12) No new firm can enter the group.

Explanation of Chamberlin’s Group Equilibrium:

Figure 4 represents the long-run equilibrium of the group under

In fact, every producer thinks and acts alike so that the dd

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