kinked demand curve under oligopoly
This tries to explain the price rigidty in oligopolistic markets.
In an oligopoly market, firms are interdependent
Before we start this explanation, kindly remember the elasticity at different points on a curve.
An oligopolist faces a downward sloping demand curve but the elasticity may depend on the reaction of rivals to changes in price and output. Assuming that firms are attempting to maintain a high level of profits and their market share it may be the case that:
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2 comments:
• Pricing under rivalry and mutual interdependence
• Each firm sets its price while explicitly considering the reaction by other firms.
• Different models used to describe behavior Kinked Demand Curve Model
Behavioral Assumption: A competitor will follow a price decrease but will not follow a price increase
• If reduce price and competitors match the price cut then move along more inelastic demand segment.
• If increase price and competitors do not follow then move along the more elastic segment.
• Accounting for the behavior of the other firms causes the demand curve to be kinked.
(Add Kinked Demand Curve Figure here)
EXPLANATION :- This demand curve DD is kinked point A. When the price is Rs. 8 per unit, a firm sells 50 units. The total revenue is 50 x 8 = Rs. 400.If a firm increases price up to Rs. 10 and its sale decreases to 20 units. The revenue will be 20 x 10 = Rs. 200. In case the price lowers revenue will be 6 x 60 = Rs. 360/-. So a firm will prefer to sell the out put at prevailing market price of Rs. 8/- per unit.
Where is curve? not surprisingly you got 8 not useful for that.
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