Chamberlin’s Duopoly Model- Assumptions, Diagram with Explanation Notes
CHAMBERLIN’S DUOPOLY MODEL
Chamberlin’s Duopoly Model makes an
advance over the classical models of Cournot, Edgeworth and Bertrand. His model
is based on the assumption that the duopolists recognize their interdependence
and act accordingly. He criticized and rejected the Cournot, Bertrand and
Edgeworth cases on the ground that in the real-world
firms are not so native that they will not learn from the past experience. One
firm’s output or price decision will definitely invite reactions of other firms
Chamberlin solution involves a kind of
understanding between the two sellers. They do not sign agreement, but each
seller is intelligent enough to realize the importance of mutual dependence.
Each act rationally, and understands that sharing monopoly profit is to the
best of his advantage. Thus, in Chamberlin's model the sellers are independent,
yet they are in a kind of collusion which leads to stable equilibrium, a sort
of monopoly equilibrium.
Assumptions
1. There are two
sellers.
2. They produce and
sell a homogeneous product.
3. Each seller knows
the demand curve for the product. Moreover, the market demand for the product
is assumed to be linear, that is, market demand curve facing the two producers
is a straight line.
4. It is based on the
assumption of zero cost of production.
5. His model is based
on the assumption that duopolists recognize their interdependence and act
accordingly.
6. It is assumed in Chamberlin’s model that the duopolist know fully the costs of production of their rivals which enable them to arrive at a monopoly output and price which is in the best interest of all of them.
Chamberlin considers the case of a duopoly with zero cost of production of the two producers, A and B. Like Cournot, he also assumes that the market demand curve for the product is linear.
In the above diagram represents this linear
demand curve for the homogeneous product of the duopolists. Suppose producer A
is the first to start production so initially he has monopoly and he is having
the knowledge of the whole market demand curve MD. MRA is the marginal revenue
curve for him. He will equate marginal revenue with marginal cost (which is
here taken to be equal to zero) for maximizing his profits [MR = MC]. He
produces OQ output which is half of OD and will fix price equal to OP. Now,
suppose producer B enters the market. He thinks, as in Cournot’s model, that
producer A would continue to produce OQ output and accepts ED portion of the
demand curve and corresponding to him MRB is the marginal revenue curve. For
maximizing profits, he will produce half of QD, that is, QL or at point L, MRB=MC.
With aggregate output OL (OL = OQ of A + QL of B), price will fall to OP1 or KL.
As a result, total profit will be OP1KL where profits earned by producer B will
be equal to the area of rectangle QLKT, and due to the fall in price the profit
of producer A will decrease from OPEQ to OP1TQ. However, from this point onward
Chamberlin’s analysis deviates from Cournot’s model. Whereas in Cournot’s
model, the firm A will readjust his output and continue to assume that his
rival will keep his output constant at QL level, but in Chamberlin’s model
producer A learns from his experience that they are interdependent. With the
realization of mutual-dependence, producer A decides to produce OH equal to
output (QL) of producer B and half of monopoly output OQ so that the aggregate
output of both of them is the monopoly output OQ, (OQ = OH of A + QL of B).
With OQ as the aggregate output level, price will rise to QE or OP. Firm B also
realises that in view of interdependence it is in the best interest for both of
them to produce half of monopoly output and will therefore maintain output at
the QL or HQ level which is half of the monopoly output. Thus, each producer
producing half of monopoly output, will result in maximization of joint profits
though they do not enter into any formal collusion.
Chamberlin’s model is
certainly more realistic as in his model duopolists
behaves intelligently and realizes their interdependence and they together
produce monopoly output and charge monopoly price each sharing profits equally.
Thank you Mam.
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