Microeconomic Theory
Price Policy in Oligopoly
Instr.: Dr. Michael Chletsos
Submitted by:
Maria Soulimioti
Price-output behavior in Oligopoly
The kinked requisite curve: This model was developed in 1939 by the economist Sweezy. It assumes that an oligopolist will expect rival firms to follow either set decrease it makes but non follow whatsoever increase. Thus the elasticity of demand for the firms product is much great above the ruling price than below it, and hence there is a kink in the demand curve confront by the firm.
For straight line demand curves the peripheral tax line lies halfway between the demand curve and the just axis. It is thus easy to show that the kink in the demand curve implies a discontinuity, i.e. a sudden drop, in the peripheral 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 maximising at MC=MR could leave price unaffected in spite of considerable fluctuations in costs and demand.
The model has been used to let off 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 feature 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 great flaw is that the model does not explain price determination, i.e. 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 commence profits than could be achieved through...
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