In the kinked demand model of oligopoly. The kinked Demand Curve: Meaning, Examples & Characteristics 2022-11-02
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In the kinked demand model of oligopoly, firms face a non-linear demand curve for their product. This means that the relationship between the price of the product and the quantity demanded is not a simple, straight line. Instead, it is characterized by a "kink" or inflection point, beyond which the demand curve becomes relatively elastic.
The kinked demand model was developed as a way to explain why firms in oligopoly markets often seem to engage in price leadership, or a pattern of setting prices in a way that follows a leader firm's pricing decisions. According to this model, firms follow a leader's price changes because they are afraid of losing market share if they deviate from the market price.
In the kinked demand model, a firm's demand curve is divided into two segments: a relatively inelastic segment below the kink, and a relatively elastic segment above the kink. Below the kink, the firm has some market power and can charge a higher price without seeing a significant decrease in demand. Above the kink, however, the firm faces more elastic demand, meaning that a small increase in price results in a large decrease in demand.
For this reason, firms in an oligopoly market will typically follow the leader firm's price changes below the kink, but will be reluctant to follow price increases above the kink. This leads to a situation where prices tend to remain stable in the oligopoly market, except for small adjustments made by the leader firm.
One of the key implications of the kinked demand model is that firms in oligopoly markets will often engage in a pattern of price rigidity, or a tendency to keep prices relatively constant over time. This can be seen as a form of collusion, or coordinated behavior, among firms in the market, as they seek to avoid the risk of losing market share by deviating from the market price.
In conclusion, the kinked demand model is a useful tool for understanding the behavior of firms in oligopoly markets. It helps to explain why firms may engage in price leadership and why prices in these markets tend to be relatively stable over time.
The kinked Demand Curve: Meaning, Examples & Characteristics
ADVERTISEMENTS: Fourth, in the model under discussion, the firm may not have to change the price of its product, even if its cost of production rises. . This causes a higher or lower quantity to be supplied at a given price. What causes shift in supply curve? Why is it that the demand curve of a non collusive oligopoly kinked? One is highly elastic and other is highly inelastic. C average variable cost curve is discontinuous. On the other hand, if the organization increases the price, the competitor organizations would also cut down their prices. ADVERTISEMENTS: On the basis of the above discussion, we may conclude that in the kinked demand curve model of oligopoly, the firm would not consider it profitable or rational to change the prevailing price of its product because of the assumption v relating to the reaction pattern of its rivals.
Kinked Demand Theory of Oligopoly » Economics Tutorials
The marginal revenue curve facing the firm is discontinuous. E marginal revenue curve is upward sloping. As explained by the kinked demand model, any increase in price is bound to result in drop in market share of the firm and any decrease in price is not going to result in any gain in market share. B other firms will lower theirs. The reason why there is a kink in the demand curve is that there are two demand curves: one that is inelastic and one that is elastic. A A natural or legal barrier to entry exists.
There are two companies which control the vast majority of the market share of the soft drink industry which is Coca-Cola and Pepsi. This portion of demand curve shows that if an oligopolistic firm increases its price the other firms will not increase their prices. What are the basic assumptions of kinked demand curve model? Total revenue will decrease, and over time, there will be no change in market share. Inelastic Portion: It is such portion of demand curve which is below prevailing price level. Due to this the firm keeps its price constant irrespective of the increase in its marginal cost. D Firms have to consider the behaviour of their rivals since their rivals are also large relative to the size of the market as a whole.
Why the Kink in the Demand Curve? Moreover, the profits would remain same between point X and Y. A This game has no dominant strategies. Smith's strategy given what Dr. What is the demand curve for perfect competition? E entry into the industry of rival firms will raise cartel profit as long as the new firms join the cartel. ADVERTISEMENTS: Some of the major points of criticism are as follows: i. But when the firm decreases its price, its competitors also respond leading to no gain in market share for the firm. If they collude, they no longer have to worry about what their competitors are doing.
What factors affect demand curve? How does oligopoly Behaviour cause price rigidity? However, if Tesco decide to cut prices, other supermarkets will follow suit and cut prices too. A "Gas prices in this town always go up and down together. Answer: In an oligopolistic market, the kinked demand curve hypothesis states that the firm faces a demand curve with a kink at the prevailing price level. C Firms are mutually independent because there are many firms in the industry. Factors that can shift the supply curve for goods and services, causing a different quantity to be supplied at any given price, include input prices, natural conditions, changes in technology, and government taxes, regulations, or subsidies. Following are the assumption of a kinked demand curve: i. What are the basic assumptions of kinked demand curve model? What are the 4 characteristics of oligopoly? A there are only two producers of a particular good competing in the same market B there are two producers of two goods competing in an oligopoly market C there are numerous producers of two goods competing in a competitive market D the one producer of two goods sells the goods in a monopoly market E a competitive market produces two goods 16 A monopolistically competitive firm is like an oligopolistic firm insofar as A both face perfectly elastic demand.
Due to the kink in the demand curve of the oligopolist, his MR curve is discontinuous at the level of output corresponding to the kink. As explained by the kinked demand model, any increase in price is bound to result in drop in market share of the firm and any decrease in price is not going to result in any gain in market share. An oligopolistic firm will remain on fixed portion. A is; all other firms act as if they are perfectly competitive B is not; other firms can enter, which increases supply, decreases the price, and drives economic profit down to zero C is; the dominant firm is making an economic profit D is; the smaller firms cannot become the dominant firm E is not; frequently one of the smaller firms becomes the dominant firm, and the original dominant firm becomes less important 14 The kinked demand curve model A suggests that price will remain constant even with fluctuations in demand. This is called price war. The result is that for each firm the portion of the demand curve above the current price is elastic and the portion below the curve is inelastic.
Why oligopoly kinked demand curve? Explained by FAQ Blog
B predict that an increase in price by one firm is accompanied by price increases of other firms if every firm experiences a large enough increase in marginal cost. E other firms will not raise theirs. Each optometrist can choose to advertise his service or not. Let us understand price and output decisions under cartels with the help of an example. E None of the above. ADVERTISEMENTS: This would result in producing the kinked demand curve.
The kinked demand curve examples There are many examples that show the kinked demand curve in practice. The oligopolist will then face the relatively less elastic or more inelastic market demand curve MD 2. Hence, it is not a theory of pricing, but rather a tool for explaining why the price, once determined in one way or another, will tend to remain fixed. Thus, there is no motivation for increasing or decreasing prices. ADVERTISEMENTS: The point of the kink shifts upwards to the left, and equilibrium is established at a higher price and a lower output figure 9. D potential entrants not entering the market.
