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What message you get from the kinked demand curve?

What message you get from the kinked demand curve?

The kinked-demand curve explains why firms in an oligopoly resist changes to price. If one of them raises the price, then it will lose market share to the others.

What is kinked demand curve theory?

The Kinked-Demand curve theory is an economic theory regarding oligopoly and monopolistic competition. Kinked demand was an initial attempt to explain sticky prices.

Which of the following is the assumption of oligopoly?

The basic assumptions for this model of oligopoly often referred to a cartel or a collusion oligopoly is that the firms sell identical goods and agree to keep the price and quantity produced constant. In doing so, the firms establish a monopolistic market despite there being multiple firms which hold the market power.

What assumptions about a rival’s response to price changes underlie the kinked demand curve for oligopolists?

The assumptions that (i) rivals will match price cuts, but (ii) rivals will ignore price increases, underlie the kinked-demand curve that represents an oligopoly non-collusive market model.

Who gave the concept of kinked demand curve?

American economist Sweezy came up with the kinked demand curve hypothesis to explain the reason behind this price rigidity under oligopoly. According to the kinked demand curve hypothesis, the demand curve facing an oligopolist has a kink at the level of the prevailing price.

What are the 4 characteristics of oligopoly?

Four characteristics of an oligopoly industry are:

  • Few sellers. There are just several sellers who control all or most of the sales in the industry.
  • Barriers to entry. It is difficult to enter an oligopoly industry and compete as a small start-up company.
  • Interdependence.
  • Prevalent advertising.

Which of the following is an assumption of the theory of oligopoly quizlet?

Which of the following is an assumption of the theory of oligopoly? There are barriers to entry and Firms produce and sell either homogeneous or differentiated products.

What are the shortcomings of the kinked demand model?

Drawbacks Of Kinked Demand Curves First, it does not explain the mechanism of establishing the kink in the demand curve. It also does not state how the kinked demand curve is reformed when price/quantity changes. Most of the time, other oligopolists follow pricing decisions when one oligopolist increases the price.

Why is there a gap in the Oligopolist’s marginal revenue curve?

increase market share even more by secretly charging less than the agreed upon price. match price cuts but ignore price increases. There is a gap in the oligopolist’s marginal-revenue curve because. the cost of production changes abruptly.

How does the kinked demand curve model work?

In the case of the kinked demand curve model this interdepence works as follows. The model assumes that an increase in a firm’s price will not be followed by a price increase by the other firms within the market. Conversely, a price decrease will lead to a reaction by the other companies.

How does an oligopoly affect the kinked demand curve?

Not clear but firms operating under kinked demand curve may end up setting price higher than marginal cost. Also firms able to successfully collude will set prices higher than MC. If oliogopolies are competitive then prices will be lower and more allocative efficient.

What happens when demand is kinked in a price war?

Because there is a ‘price war’ demand for a firm is price inelastic – there is a smaller percentage rise in demand. If demand is inelastic and price falls, then revenue will fall. If the kinked demand curve is true, the firm has no incentive to raise price or to cut price.

Can a demand curve be obtained as a continuous curve?

In the first place, as the demand curve or the average revenue (AR) curve of the firm has a kink, its MR curve cannot be obtained as a continuous curve. We may, therefore, begin with the properties of the MR curve of the kinked demand curve with the help of Fig. 14.19. The kinked demand curve of the firm in this Fig. is dRD’.