An oligopoly is a market structure in which a small number of firms dominate the industry and are able to influence the market. In an oligopoly, firms are interdependent, meaning that their actions and decisions have an impact on each other and the market as a whole. This interdependence creates strategic behavior among firms, which can lead to different outcomes in terms of prices and output compared to a perfectly competitive market.
One way to analyze the behavior of firms in an oligopoly is through the use of demand curves. In a perfectly competitive market, the demand curve for a firm is perfectly elastic, meaning that the quantity demanded of the firm's product will change significantly in response to even small changes in price. In an oligopoly, however, the demand curve for a firm is likely to be more inelastic, meaning that the quantity demanded is less responsive to changes in price.
There are several reasons why the demand curve for a firm in an oligopoly may be more inelastic. First, in an oligopoly, there are likely to be close substitutes for the product being offered by the firm. This means that consumers have the option to switch to a similar product offered by a different firm if the price of the original product increases. As a result, the firm may be less able to increase the price of its product without losing market share.
Second, in an oligopoly, firms may engage in strategic pricing, meaning that they take into account the actions of their competitors when setting prices. For example, if one firm raises its price, it may expect that its competitors will follow suit in order to maintain their market share. This can lead to a situation known as price rigidity, where the price of the product remains relatively constant even in the face of changes in cost or demand.
Finally, in an oligopoly, firms may also engage in non-price competition, such as advertising or product differentiation, in order to attract and retain customers. This can further reduce the responsiveness of the demand curve to changes in price.
Overall, the demand curve for a firm in an oligopoly is likely to be more inelastic compared to a perfectly competitive market. This means that the firm has less ability to increase prices without losing market share, and may need to rely on other strategies such as non-price competition to attract and retain customers.
The Kinked Demand Curve Theory of Oligopoly
What is the main point of the kinked demand model? On the other hand, if price falls, the rivals would also reduce their prices, thus, the sales of the oligopolistic organization would be less. This oligopoly would never have passed legal convention if the regulators at the Federal Communications Commission and in the antitrust division of the Justice Department were doing their jobs, or if the Telecommunications Act of 1996 were not railroaded through Congress. The firm will be worse off. Instead, most collusion is tacit, where firms implicitly reach an understanding that competition is bad for profits. A perfect elasticity of demand refers to a situation where any increase in price forces the demand to drop. As a result, the upper segment of the demand curve becomes more elastic, that is, it becomes more nearly horizontal. As for the oil exporting countries.
Why Is Demand Curve Kinked In Oligopoly?
They instead compete by creating a brand, providing customer service, discounts and coupons, and product differentiation. Lays emphasis on price rigidity, but does not explain price itself. A distinguishing characteristic of an oligopoly is the interdependence of firms. This paper's major contribution is to assist in answering the first question. Why do oligopolists frequently appear to act together? Our analysis shows that whether we use kinked demand curve of the type postulated by Sweezy, or Hall and Hitch prices are unlikely to be stable during the boom periods. The task of public policy with regard to competition is to sort through these multiple realities, attempting to encourage behavior that is beneficial to the broader society and to discourage behavior that only adds to the profits of a few large companies, with no corresponding benefit to consumers.
Why oligopoly kinked demand curve? Explained by FAQ Blog
For avoiding such type of problems, organizations enter into an agreement regarding uniform price-output policy. In Figure-2, the MC curve intersects MR at point Y where at output OQ. From above, it is clear that the kinked demand curve analysis of oligopoly explains stability in price in the face of falling costs or declining demand, whereas, price are likely to rise when either the costs rise or demand increases. 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. ADVERTISEMENTS: Large reduction in sales following an increase in price above the prevailing level by an oligopolist means that demand with respect to increases in price above the existing one is highly elastic. Therefore competition is based on branding, advertising, quality of product quality of service, etc. However, if firms collude, they can agree to restrict industry supply to Q2, and increase the price to P2.
10.2 Oligopoly
Therefore, firms compete using non-price competition methods. It can take the form of cartel or price leadership. This would be collusion, which is illegal in many advanced economies. What is the difference between collusive oligopoly and non collusive oligopoly? As can be seen above, a firm cannot gain or lose by changing its price from the prevailing price in the market. Prior to this time, the airline industry operated much like a public utility, while fare prices had declined 20 years before the deregulation was introduced. By agreeing to carve up the ice market, control broad geographic swaths of territory, and set prices, the icemakers moved from perfect competition to a monopoly model.
Oligopoly Defined: Meaning and Characteristics in a Market
However, the challenge for the parties is to find ways to encourage cooperative behavior. ADVERTISEMENTS: On the other hand, in the face of a decline in demand it is very certain that the increase in price by one oligopolist will never be followed by others. A reduction in advertising would help lower prices and possibly increase product output. Population: Factors Affecting International Oil Prices and Their Impact on the Economies of OPEC Countries, Gulf Economic Magazine, Center for Arab Gulf Studies, University of Basra, 26, 43. The idea is, as long as costs change within this vertical gap, if the oligopolies are a profit maximize their production, Where MC equals MR, they are going to be charging a price of P1. . As a consequence to the above, is that monetary policy is more successful in speeding up or slowing down economic growth.
