We have analysed so far the equilibrium of an individual firm under monopolistic competition. i.e.. Individual Equilibrium, Let us now study the case of Group Equilibrium. Group equilibrium means price output adjustment of a number of firms, instead of an individual firm. whose products arc close substitutes. In fact. product differentiation referred to earlier in this chapter creates difficulties in thc analytical treatment of the industry because heterogeneous products cannot he added to form the market demand and supply schedules. Chamberlin uses the concept of ‘prod group’ for industry. TIle product group includes products which arc closely related. i.e. arc technological and economic substitutes, Technological substitutes arc products which can technically cover the same want and substitutes refer to products which cover the slime want and have similar prices. An operational definition of the product group is the demand for each single product be highly elastic and that it shifts appreciably when the prier of the other products in the gmul’ changes. That is the ‘group or industry should have and price elasticities. Product difference enable, cache firm to charge a different prices. In each industry. one can imagine different groups of firms fonning an industry of their own. For example. in the automobile industry. a group of firms may be manufacturing light cars and another group making heavy trucks. The firms in the car group may be making various types of cars. e.g Fiat. Ambassador, Standard cars which are close substitutes for one another . bURnet perfect substitutes or completely homogeneous products because it is a case of monopolistic competition. Each firm within a group has a monopoly of its own product. yet there is competition among those firms which arc producing closely related products price-output decision of one firm will affect the decisions of rival firms. The qualitative difference among the products of the monopolistically competitive finns results in large variation in cost and demand (AR) curves of the various firms, The demand curves also differ in elasticity, Similarly. the shape and position of cost curves too differ. As a result. there are
differences in prices. output and profits of the various firms in the group.
Chamberlain ignores the heterogeneous conditions regarding prices. output. etc., of tbe various firms for the sake of simplicity of group analysis. He adopts what is called ‘uniformity)· assumption.” In other words, he assumes that demand and cost curves of all the products in the group arc uniform. At the same time, differentiation of products is not reduced. Only, it is assumed that the consumers’ preferences arc evenly distributed among the different varieties and the differences among them are not such as to give rise to differences in cost. That is. the demand curves and cost curves are similar. Chamberlain introduces another assumption called by Stigler “S)·l1l1l1(‘tr~·lIS~lIlIlpti””:’ which means that thc number of firms under monopolistic competition is large enough to ensure that individual decision regarding
price and output adjustment has negligible influence on the rivals. There IS thus no possibility of retaliation.
Wc now proceed to the analysis of group equilibrium subject to the assumptions made above. Within the group, if a firm has successfully designed a popular brand. it will be making supernormal out, in the long-run, other firms will imitate the design that extra profits will tend to disappear. This is what happens within the competitive groups. But If the group as a whole is making supernormal profits in the short-run, outside firms will enter into the group, unless the entry is legally or economically barred. In this way extra profits will be competed away.