Equilibrium is determined by the tangency of d e d e

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Equilibrium is determined by the tangency of d ||| e d ||| e and the LAC. At the point of tangency the DD curve cuts the d ||| e d ||| e curve. Obviously it will pay no one firm to cut the price beyond that point, because its costs of producing the larger output would exceed the price at which this output could be sold in the market. Model 3: Equilibrium through Entry and Price Competition . D | D* D LMC d P e 2 C A d | P 1 B d* e 1 LAC d || d P* E D d | D | D* d* d || X X 1 X 2 X* MR* Q 79 | P a g e
Figure 6.6 Long-run Equilibrium with Entry and Price Competition Chamberlin suggests that in the real world adjustment towards long run equilibrium takes place through both entry/exit and price competition. Price adjustments are shown along the dd | curve while entry/exit cause shifts in the DD’ curve. Equilibrium is stable if the dd | curve is tangent to the AC curve and expected sales are equal to actual sales, i..e, DD | curve cuts dd | curve at the point of tangency of dd’ & LAC. Let’s start from e 1 where there is an abnormal profit. This excess profit attracts other firms to enter into the market. When they enter in to the market, the market will be shared by larger number of firms then DD (market share curve) keeps on shifting left ward until it becomes tangent to LAC. Although, firms earn normal profit, e 2 does not constitute stable equilibrium, because the firm believes that dd is its demand curve. By taking dd as its sales planning function the firm will feel that it can expand sales and earn excess profit by reducing price to P1. But all the firms will be doing the same thing simultaneously. As price is reduced by all firms demand shifts down to d | d | and each firm realizes a loss of area CABP 1 instead of positive profit. The firm is still in myopia assumption, now also he believes that he can obtain positive profit by cutting its price. However, all the firms do the same. One might think that the process would stop when dd becomes tangent to the LAC, dd*. This would be so if the firm could produce X*. However, there are so many firms and the share of the firm is only X2. The frim still on the myopia assumption believes that it can reach X* if he reduces to P*. However, all firms do the same and dd* falls below the LAC with ever increasing losses. At this time, the financially weakest firms will leave the market. So that the surviving firms will have a higher market share then DD | will move to the right with dd | . Exit will continue until the dd becomes tangent to the LAC curve and the market share curve, DD, cuts the dd curve at the point of tangency, point E. Equilibrium is then stable at point E with normal profits earned by all firms and no entry or exit taking place. The equilibrium price is P*, which is unique and each firm have a share equal to OX* at E, expected share is equal to actual sale.

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