The market demand curve that each oligopolist faces is determined by the output and price decisions of the other firms in the oligopoly. The kinkeddemand curve theory is an economic theory regarding oligopoly and monopolistic competition. The roots of supermarkets are the cooperative of the nineteenth century. Hall and hitch, 1939 has been one of the staples of oligopoly theory. Collusive and noncollusive oligopoly what is an oligopoly. Mba2 oligopoly kinked demand curve assignment assignment directions. The paper starts with a discussion of the traditional explanations of the kinked demand curve.
The kinked demand curve theory is an economic theory regarding oligopoly and monopolistic competition. The kinked demand curve model assumes that a business might face a dual demand curve for its product based on the likely reactions of other firms to a change in its price or another variable. Key theorists cournots theory explains how if the barriers to entry are low, then the. The demand curve will be kinked, at the current price. With regards to oligopoly it can provide insights into how likely collusive behavior will succeed. If a few firms dominate an industry the market is known as a monopolistic competition b competitively monopolistic c duopoly d oligopoly. By formalizing the kinked demand theory as an extensive form game i reinterpret it as a theory of price determination when firms can respond without delay to undercutting. Mba2 oligopoly kinked demand curve assignment assi.
This kinked curve happens because in oligopolies they are facing competition. In a cartel member firms may be given a fixed amount to produce. Price rigidity characteristics of oligopolistic market by which firms are reluctant to change price even if their cost and. A cartel is defined as a group of firms that gets together to make output and price decisions. The fourfirm concentration ratio will rise following. Pdf the kinked demand curve, facilitating practices, and. There is a kink at the point r p 1, q 1 on this curve, because the curve consists of a segment dr of the relatively flatter curve dd and another segment rd of the relatively steeper curve dd. Evidence from scanner data article in scandinavian journal of economics 11220061011 january 2006 with 208 reads how we measure reads. Supermarket has brought into the service for man for long. Shortcomings of the kinkeddemand model include essay.
Kinked demand curve model with criticisms oligopoly. Kinked demand curve model of oligopoly with diagram. Likewise, the kinked demand curve theory explains that even when the demand conditions change, the price may remain stable. This is demand curve for oligopolistic competition, in which there are less than 10 producers and there are huge nu. Then it is shown that the equilibrium price is attained at a kink of the demand curve of the leader, implying rigidity of price. Therefore, the first derivative point is undefined and leads to a jump discontinuity in the marginal revenue curve classical economic theory assumes that a profitmaximizing. The conditions that give rise to an oligopolistic market are also conducive to the formation of a cartel. I provide a microfounded theory for one of the oldest, but so far informal, explanations of price rigidity. The kinked demand curve revisited ryerson university. When the possibility of entry is taken into account, the. Oligopoly characteristics economics online economics. In terms of game theory, and taking a simple 2 firm and 2 choice payoff matrix, the choice taken will often depend upon whether the airline is optimistic or pessimistic about what rivals do, in a similar way to prisoners in the prisoners dilemma. View notes chapter 11 from econ 2002 at johnson and wales university shortcomings of the kinked demand model include essay. Oligopoly and strategic pricing in this section we consider how.
A kinked demand curve occurs when the demand curve is not a straight line but has a different elasticity for higher and lower prices. While the kinked demand curve has been around for fifty years, it is largely discredited today. One example of a kinked demand curve is the model for an oligopoly. Theory kinked demand curves and traditional demand curves are similar in that they are both downwardsloping. Kinked demand curve essay example graduateway an premise of the kinked demand curve theory is that an oligopolistic house will confront two demand curves as a consequence of a crick. When it was created, the idea fundamentally challenged classical economic tenets such as efficient markets and rapidly changing prices, ideas that underlie basic supply and demand models. According to the kinked demand curve hypothesis, the demand curve facing an oligopolist has a kink at the level of the prevailing price. Therefore this suggests that prices will be rigid in oligopoly. How the kinked demand model of oligopoly explains price rigidity and the incentives for collusion in a market with few sellers. Kinked demand was an initial attempt to explain sticky prices.
Proposed by paul m sweezy many oligopolistic firms exhibit high degree of price rigidity or sickness. Price competition, kinked demand curves, and edgeworth cycles by eric maskin and jean tirole1 we provide game theoretic foundations for the classic kinked demand curve equilibrium. So they will have a tendency not to change the price at all. Start studying unit 3 oligopoly and the kinked demand theory. In an oligopolistic market, firms cannot have a fixed demand curve since it keeps changing as competitors change the pricesquantity of output.
Assuming that some customers observe at no cost only the price of the store they happen to be at gives rise to a kink in firms demand curves. It has been observed that many oligopolistic industries exhibit an appreciable degree of price rigidity or stability. Oligopoly traits a theory relating to possible payoffs during the decision making process. The theory can be criticised for not explaining why firms start out at the equilibrium price and quantity. They are distinguished by a hypothesized concave bend with a discontinuity at the bend the kink. Pdf a behavioural approach to kinked demand curves. Learn vocabulary, terms, and more with flashcards, games, and other study tools. The kinked demand curve model assumes that a business might face a dual demand curve for.
Another explanation of the rigidity of oligopoly prices is offered by the abnormal shape of an oligopolies marginal revenue curve, when it faces a kinked demand curve. Game theory kinked demand curvedemand curve p elastic inelastic p d or d q or q q or q kinked demand curvedemand curve p elastic. Advantages and disadvantages of the oligopoly market system. The elasticity of demand, and hence the gradient of the demand curve, will be also be different. Unit 3 oligopoly and the kinked demand theory flashcards. A kinked demand curve model is explained with the help of figure2. Game theory and the kinked demand curve can help analyse price reductions in oligopolistic markets. Understand the characteristics of this market structure with particular reference to the interdependence of firms explain the behaviour of firms in this market structure explain reasons for collusive and noncollusive behaviour evaluate the. The kinked demand curve model predicts that usually oligopolists will not find either prospect very attractive. The point of the crick is the constituted market monetary value within the industry. Our paper provides a game theoretic interpretation of the old kinked demand curve theory which unlike.
In particular, the upper section of the kinked demand curve has a higher price elasticity than the lower part. The following section considers the construction of a kinked demand based on the behavioural assumption of psychological sensitivity. The kinked demand curve theory of oligopoly assumes that rival firms. The kinked demand curve model assumes that a business might face a dual demand curve for its product based the kinked demand curve model assumes that a business might face a dual demand curve for its product based on the likely reactions of other firms to a change in its price or another variable. It was originally formulated as a theory of price rigidity. What is the kinked demand curve model of oligopoly. Overview and quantity competition with large fixed costs by eric maskin and jean tirole the paper introduces a class of alternatingmove infinitehorizon models of duopoly. This model of oligopoly suggests that prices are rigid and that firms will face different effects for both increasing price or decreasing price. The kinked demand curve model also called sweezy model posits that price rigidity exists in an oligopoly because an oligopolistic firm faces a kinked demand curve, a demand curve in which the segment above the market price is relatively more elastic than the segment below it. We investigate whether the price elasticity of demand does indeed rise in the.
The segment below the prevailing price level is inelastic. In this article, we will look at the kinked demand curve hypothesis. Assuming that some customers observe at no cost only. The idea of the kinked demand curve is based on the different perception of the firms in imperfect markets. Yet, existing models with price rigidities often lack compelling microfoundations. These two early theories constitute the classic approach to demand curve which relates to the theory of the firm.
Since an oligopolist is not aware of the demand curve, economists have designed various priceoutput models based on the behavior pattern of other firms in the industry. The slope of a kinked demand curve differs in different conditions, such as price increase and price decrease. There is limited realworld evidence for the kinked demand curve model. This essay will discuss the advantages and disadvantages of the oligopoly market system. The segment above the prevailing price level is highly elastic.
One of the oldest and most popular approach to kinked demand curves is sweezys oligopoly model sweezy, 1939. Kinked demand curve model price rigidity graph example. Assuming that some customers observe at no cost only the price of the store they happen to be at gives rise to a kink in. In this model, every organization faces two demand curves. In other words, in many oligopolistic industries prices remain sticky or inflexible, that is, there is no tendency on the part of the oligopolists to change the price even if. The diagram above suggests that a change in marginal cost still leads to the same price, because of the kinked demand curve.
1029 705 751 604 998 1161 1311 1359 1308 1193 140 99 1276 495 414 862 1035 1225 349 31 1358 1046 889 563 588 367 4 1094 397 1385 443 378 761 510 53 975 405 631