scroll to top
Stuck on your essay?
Get ideas from this essay and see how your work stacks up
Word Count: 1,399
Microeconomic Theory Price Policy in Oligopoly Instr Dr Michael Chletsos Submitted by Maria Soulimioti Price-output behavior in Oligopoly The kinked demand curve This model was developed in 1939 by the economist Sweezy It assumes that an oligopolist will expect rival firms to follow any price decrease it makes but not follow any increase Thus the elasticity of demand for the firms product is much greater above the ruling price than below it and hence there is a kink in the demand curve faced by the firm For straight line demand curves the marginal revenue line lies halfway between the demand curve and the vertical axis It is thus easy to show that the kink in the demand curve implies a discontinuity ie a sudden drop in the marginal revenue curve of the firm Marginal cost could thus vary greatly but still pass through this discontinuity in marginal revenue Equally changes in market demand could shift demand curves in and out without affecting the height of the kink In short profit maximizing at MCMR could leave price unaffected despite considerable fluctuations in costs and demand The model has been used to explain why prices appear to fluctuate less in oligopolistic markets than in competitive markets The model has serious flaws however again it implies a knowledge of marginal costs and revenue not possessed by real firms it is not clear that entrepreneurs hold such pessimistic expectations of the reactions of their competitors the evidence on price stickiness is not as clear cut as many believe But the greatest flaw is that the model does not explain price determination ie it does not explain how the prevailing price was established or what happens when the price is eventually changed Collusive Pricing Rivalry usually results in lower profits than could be achieved through firms cooperating with one another Such cooperation to limit competition is known as
@Kibin is a lifesaver for my essay right now!!
- Sandra Slivka, student @ UC Berkeley
Wow, this is the best essay help I've ever received!
- Camvu Pham, student @ U of M
If I'd known about @Kibin in college, I would have gotten much more sleep
- Jen Soust, alumni @ UCLA