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# Oligopoly,duopoly

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### Oligopoly,duopoly

1. 1. Price-Output Determination under Monopolistic CompetitionSince, under monopolistic competition, different firms produce different varieties of products,prices will be determined on the basis of demand and cost conditions. The firms aim at profitmaximisation by making adjustments in price and output, product adjustment and adjustment ofselling costs. Equilibrium of a firm under monopolistic competition is based upon the followingassumptions:1. The number of sellers is large and they act independently of each other.2. The product is differentiated.3. The firm has a demand curve which is elastic.4. The supply of factor services is perfectly elastic.5. The short run cost curves of each firm differ from each other.6. No new firms enter the industry.Individual Equilibrium and Price VariationBased on these assumptions, each firm fixes such price and output which maximises its profit.Product is held constant. The only variable is price. The equilibrium price and output isdetermined at a point where the short run marginal cost equals marginal revenue. Theequilibrium of a firm under monopolistic competition is shown in figure below.DD is the demand curve of the firm. It is also the average revenue curve of the firm. MC is themarginal cost of the firm. The firm will maximise profits by equating marginal cost withmarginal revenue. The firm maximises its profit by producing OM level of output and selling itat a price of OP. The profit earned by the firm is PQRS. Thus in the short run, a firm undermonopolistic competition earns supernormal profits.In the short run, the firm may incur losses also. This is shown in figure below.Page 188 last figure
2. 2. The firm is in equilibrium by producing an output of OQ. It fixes the price at OP. As price is lessthan cost, it incurs losses equal to PABC. Thus a firm in equilibrium under monopolisticcompetition may be making supernormal profits or losses depending upon the position of thedemand curve and average cost curve.Group Equilibrium and Price VariationGroup equilibrium refers to price-output determination in a number of firms whose products areclose substitutes. The product of each firm has special characteristics. The difference in thequality of the products of the firms under monopolistic competition results in large variation inelasticity and position of the demand curves of the various firms. Similarly the shape andposition of cost curves too differ. As a result there exist differences in prices, output and profitsof the various firms in the group. For the sake of simplicity in the analysis of group equilibrium,Chamberlin ignores these differences by adopting infirmity assumption. He assumes that the costand demand curves of all the products in the group are uniform. Chamberlin introduces anotherassumption known as symmetry assumption. It means that the number of firms undermonopolistic competition is large and hence the action of an individual firm regarding price andoutput will have a negligible effect upon his rivals.Based on these assumptions, short run equilibrium of a firm under monopolistic competition canbe shown in Figure below:Page 189 last figureFigure (A) represents short run equilibrium and figures (B) the long run equilibrium. In the shortrun, the price is OP and average cost is only MR. Hence there is supernormal profit equal toPQRS. But in the long run, as shown in figure 27 (B), the excess profit is competed away. MC =MR at OM level of output. LAR is tangent to LAC. Price is equal to average cost and there is noextra profit. Only normal profit is earned.
3. 3. PRODUCT DIFFERENTIATIONWhile analysing the equilibrium of a firm with regard to the variation of the product we assumethe price of product to be constant. The firm has to select among the various possible qualitiesand attributes of the product. An important characteristic of product variation is that it changesthe cost curve and demand for the product. Therefore, the entrepreneur has to choose the productwhose cost and demand are such as to yield maximum profit. Yet another feature of productvariation is that product variation is qualitative and therefore, quantitative measurement is notpossible.INDIVIDUAL EQUILIBRIUM AND PRODUCT VARIATIONThe equilibrium of the firm under condition of product variation is shown in figure below:Page 191 1st figAA is the average cost curve of the product A and BB is the average cost curve of the product B.The price of the product is OP. If OM quantity of the product A is demanded at the price of OP,the total costs are OMRS. The entrepreneur earns an abnormal profit equal to PQRS. If theQuantity demanded of the product B is ON, then the total costs are ONFG and the total profitsmade by the entrepreneur are GFEP. Since the product B yields greater profits than A, theentrepreneur will select the product B.Group Equilibrium and Product VariationIt is assumed that the demand is uniform and the possibility of product variation is also uniform.The equilibrium adjustment of the product is shown in figure below:CC1 is the average cost curve. If the quantity demanded is OM then the total cost is OMHG. Thefirm earns supernormal profits equal to GHQP. This supernormal profits should be wiped awayto achieve group equilibrium. Attracted by the supernormal profits, new competitor may enterthe group. The quantity demanded will come down to OT.