Chamberlin's model of non-collusive oligopoly

Chamberlin's Model

Chamberlin questioned the illogical assumption in all the three classical models of oligopoly( Cournot's Model, Bertrand's model and Edgeworth's Model) namely, that the producers do not learn from their experience even when their assumption regarding the behaviour- reaction of the rival producers is falsified again and again. These models imply that the oligopolists are so short-sighted that they are unable to recognise their mutual dependence. Chamberlin does away with this unrealistic assumption and instead assumes that oligopolists are sure to recognise their mutual dependence either intuitively or as a result of experience.


Thus the distinguishing feature of Chamberlin's model of oligopoly is that it is securely based on the assumption that the duopolists or the oligopolists, as the case may be recognise their mutual dependence. Therefore, in his model, the oligopolist does not assume that his rivals will continue to stick to their output or price or both regardless of what he does to his own output or price or both. Instead, he perceives that any move by him to gain advantage at the expense of his rivals will be retaliated. If any individual oligopolist thinks of lowering his price he can easily see that the number of firms in the “industry” or “group” being very small particularly in the case of duopoly, the adverse effect of his price-cutting on the sales of his rivals will be significant. Therefore, he will foresee that his rivals will not stick to their current price and output but will strike back by lowering their prices.

On account of this perception he can easily see that his own sales, as the result of price-cutting, will increase not along the elastic sales curve dd' of Fig. I above but along the inelastic sales curve DD' of this Fig. 1. Such a result of a price cut by any of the oligopolists is not likely to increase his profits. Hence, the oligopolists recognising their mutual dependence, will avoid any engagement in a price war one another.

The same recognition of mutual dependence which prevents the oligopolists from indulging in price cutting competition will induce them to fix their price at the level which would have prevailed under monopoly. Of course, this is based on the heroic assumption that the cost curves of the oligopolists are identical and such that, when added together, will become identical with the cost curves of single monopolists. The equilibrium output of the “industry”or the “group”, in that case, will be the same as the equilibrium monopoly output under a single monopolists and this total output will be equally shared by all the oligopolists. It may be thought that the solution of equilibrium problem under oligopoly as suggested by Chamberlin and explained above points towards “collusion” among the oligopolists. But Chamberlin argues that the monopoly arrangement among the oligopolists that results in his model is not the result of any collusion among them. It rather results from the oligopolist's intuition or business sense or their experience gained through some earlier price war.

It may be thought that the solution of equilibrium problem under oligopoly as suggested by Chamberlin and explained above points towards
“collusion” among the oligopolists. But Chamberlin argues that the monopoly arrangement among the oligopolists that results in his model is not the result of any collusion among them. It rather results from the oligopolist's intuition or business sense or their experience gained through some earlier price war.

However, regardless of the contention of Chamberlin his model is not a model of a purely non-collusive oligopoly. There may not be in his model an open agreement among the oligopolists on the monopoly arrangement, but there is a tacit agreement all the same.

We see that even on the basis of the four models considered above there is no unique equilibrium under oligopoly. There are quite a number of
other models too, some of which we shall examine ahead in this lesson, which point towards still different solutions. In view of it, it is quite apt to state that equilibrium under oligopoly is indeterminate.

We have already pointed out the basic weakness of the classical models, namely, that they implicitly assume that oligopolists do not learn from their experience. That they are permanently short-sighted and therefore fail to recognise their mutual dependence. Chamberlin's model does not suffer from this failing but his model is not a model of a genuine not-collusive oligopoly. But there is another more fundamental weakness which not only Chamberlin's model but also a number of other models share with the classical models.

All models of non-collusive oligopoly are based on the assumption of perfect knowledge and they rule out uncertainty. As soon as we introduce uncertainty into a model of oligopoly, the analysis of equilibrium under oligopoly becomes even more complicated.

This has led some mathematical economists like Von Neumann and Morgenstern to suggest that laws governing the behaviour of oligopolists resemble not to the laws of physics, from which the technique of equilibrium analysis has been borrowed by the economists, but the laws governing the outcome of games and wars which involve strategies and counter-strategies.

There is still another line of reasoning. It is suggested that as fighting out oligopolistic wars in real life is full of uncertainty, it is very likely to prove futile. The quest for maximum profit under conditions of oligopoly involving business wars : strategies and counter- strategies with uncertain results has a very high cost in terms of tensions, strains and anxieties. It is argued that realisation of this truth may induce the oligopolists to abandon the quest for maximum profits. In fact the analysis of the problems of oligopoly has led
economists to question the realism and relevance of the profit- maximising assumption of the neo-classical economics. It is suggested that under
oligopoly, at least, the entrepreneurs are likely to prefer a relatively leisured and less tense life to the strains and stresses of fighting oligopolistic wars, provided they are earning “satisfying” profits. This suggests that prices and output, particularly prices, tend to be rigid under oligopoly. The rigidity or “stickiness” of prices under oligopoly can be accounted for by the factor that the oligopolists might be earning “satisfying” profits at the current price level and they may be uncertain with regard to the behaviour reaction of the rivals on account of which they are afraid of experimenting with price changes. Even when they are not uncertain about the behaviour reaction of the rivals, their
perception of such behaviour reaction may be such that they do not see any.possibility of increasing their profits by changing the price. Consequently, they stick to their prices being currently charged. There are a particular kind of models of oligopoly which explain this last mentioned case of rigidity orstickiness of prices. They are known as the “kinky” or “kinked-demand” models of oligopoly .