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Kinked demand curve theory
This was developed in the late 1930s by the American Paul Sweezy. The theory aims to explain the price rigidity that is often found in oligopolistic markets. It assumes that if an oligopolist raises its price its rival will not follow suit, as keeping their prices constant will lead to an increase in market share. The firm that increased its price will find that revenue falls by a proportionately large amount, making this part of the demand curve relatively elastic (flatter).
Conversely if an oligopolist lowers its price, its rivals will be forced to follow suit to prevent a loss of market share. Lowering price will lead to a very small change in revenue, making this part of the demand curve relatively inelastic (steeper).
The firm then has no incentive to change its price, as it will lead to a decrease
in the firm's revenue. This causes the demand curve to kink around the present market price. Prices will further stabilize as the firm will absorb changes in its costs as can be seen in the diagram below. The marginal revenue jumps (vertical discontinuity) at the quantity where the demand curve kinks, the marginal cost could change greatly - e.g., MC1 to MC2 (between prices a and b)- and the profit maximizing level of output remains the same.
What else can I help you with?
What is the price elasticity in a oligopoly?
in oligopoly what is the nature of price elasticity
Why is Price Stickiness likely to happen in an oligopoly market structure?
Price stickiness in an oligopoly market structure occurs because firms are interdependent and tend to avoid price wars that could erode profits. When one firm changes its price, others often follow suit to maintain market share, leading to a tacit understanding that prices should remain stable. Additionally, firms may rely on non-price competition, such as advertising and product differentiation, to attract customers rather than altering prices. This behavior results in a reluctance to change prices frequently, contributing to price rigidity in the market.
What is price leadership model of an oligopoly?
The price leadership model of an oligopoly occurs when one dominant firm sets the price for a product, and other firms in the industry follow suit, adjusting their prices accordingly. This leader typically has a significant market share and acts as a benchmark for pricing strategies. Price leadership can help maintain stability in the market by reducing price competition and enabling firms to achieve higher profits. It can manifest in different forms, such as dominant firm price leadership, where a single firm leads, or collusive price leadership, where firms coordinate their pricing strategies.
Sony Ericsson is oligopoly firm?
yes
What effect does the number of firms in an oligopoly have on the characteristic of the market?
In an oligopoly, the number of firms significantly influences market dynamics. A few firms result in higher market concentration, leading to greater interdependence, where each firm's decisions impact the others. This can result in price rigidity and collusive behavior, as firms may coordinate to maximize profits. Conversely, a larger number of firms within an oligopoly can increase competition, making it less likely for firms to engage in collusion and potentially leading to lower prices and increased innovation.
What is the price elasticity in a oligopoly?
in oligopoly what is the nature of price elasticity
Why is Price Stickiness likely to happen in an oligopoly market structure?
Price stickiness in an oligopoly market structure occurs because firms are interdependent and tend to avoid price wars that could erode profits. When one firm changes its price, others often follow suit to maintain market share, leading to a tacit understanding that prices should remain stable. Additionally, firms may rely on non-price competition, such as advertising and product differentiation, to attract customers rather than altering prices. This behavior results in a reluctance to change prices frequently, contributing to price rigidity in the market.
What is price leadership model of an oligopoly?
The price leadership model of an oligopoly occurs when one dominant firm sets the price for a product, and other firms in the industry follow suit, adjusting their prices accordingly. This leader typically has a significant market share and acts as a benchmark for pricing strategies. Price leadership can help maintain stability in the market by reducing price competition and enabling firms to achieve higher profits. It can manifest in different forms, such as dominant firm price leadership, where a single firm leads, or collusive price leadership, where firms coordinate their pricing strategies.
Sony Ericsson is oligopoly firm?
yes
What effect does the number of firms in an oligopoly have on the characteristic of the market?
In an oligopoly, the number of firms significantly influences market dynamics. A few firms result in higher market concentration, leading to greater interdependence, where each firm's decisions impact the others. This can result in price rigidity and collusive behavior, as firms may coordinate to maximize profits. Conversely, a larger number of firms within an oligopoly can increase competition, making it less likely for firms to engage in collusion and potentially leading to lower prices and increased innovation.
Mutual interdependence means that each oligopolists firm?
Mutual interdependence in an oligopoly means that the decisions of one firm regarding pricing, output, or other strategic actions directly influence the decisions of other firms in the market. Each firm must consider the potential reactions of its competitors when making its own choices, leading to a strategic interrelation that can result in price rigidity or collusion. This interdependence often results in a focus on maintaining market share and stability rather than aggressive competition. Therefore, firms in an oligopoly are more likely to engage in cooperative behavior or tacit collusion to enhance their collective profitability.
Why the demand curve in an oligopoly is kinked?
because oligopolistic firms are unlikely to benefit from a reduction in prices, it is something known as game theory, each firm is attempting to get the edge over their competitor, but not with prices. This is because if one firm reduces their prices, it is highly likely that the others will do the same and in the end all parties finish with the same market share as when the price war erupted; but because they reduced prices, profit is lost, with no benefit for the firm
What is the cost to a firm in an oligopoly that fails to?
In an oligopoly, a firm that fails to effectively compete may face significant costs, including loss of market share and reduced profits. The firm could also suffer from increased price competition, leading to a price war that further erodes margins. Additionally, failing to innovate or differentiate products can result in decreased customer loyalty and a long-term decline in market position. Ultimately, these factors can threaten the firm's sustainability in a highly interdependent market environment.
Price and output determination under oligopoly?
Explain how price and output decision are taken under conditions of oligopoly.
Price wars are prima facie evidence of what economic market?
Oligopoly
What are the types of oligopoly?
Oligopoly is a market from where large numbers of buyers contact few sellers for the purpose of buying and selling things. The different types are a pure oligopoly, a differentiated oligopoly, a collusive oligopoly, and a non-collusive oligopoly.
What is the difference between overt and covert collusion's?
Overt collusion is where firms in an oligopoly formally set a price together, (usually high to maximize profits). This is usually done in secret because its illegal in most countries, but the main characteristic is that it is formal. I believe overt collusion is where on firm in an oligopoly reacts to a price drop in another firms from that oligopoly. For instance a competing firm drops there price from £1 to 50p, the other firms will have to otherwise they will lose profits, allthoufh this is bad for all firms because everybody loses potential profits. Am still researching this though so not 100% on overt collusion.
