What is kinked demand curve in oligopoly?
Answer: In an oligopolistic market, the kinked demand curve hypothesis states that the firm faces a demand curve with a kink at the prevailing price level. The curve is more elastic above the kink and less elastic below it. This means that the response to a price increase is less than the response to a price decrease.
Why oligopoly has a kinked demand curve?
The oligopolist faces a kinked‐demand curve because of competition from other oligopolists in the market. If the oligopolist increases its price above the equilibrium price P, it is assumed that the other oligopolists in the market will not follow with price increases of their own.
Who proposed the kinked demand curve?
Paul M. Sweezy
Sweezy’s Kinked Demand Curve Model: The kinked demand curve of oligopoly was developed by Paul M. Sweezy in 1939. Instead of laying emphasis on price-output determination, the model explains the behavior of oligopolistic organizations.
How does the kinked demand curve explain price rigidity in oligopoly?
As explained by the kinked demand model, any increase in price is bound to result in drop in market share of the firm and any decrease in price is not going to result in any gain in market share. This results in significant price rigidity in an oligopoly.
What is the kinked demand curve model?
A kinked demand curve occurs when the demand curve is not a straight line but has a different elasticity for higher and lower prices. This model of oligopoly suggests that prices are rigid and that firms will face different effects for both increasing price or decreasing price.
Who introduced imperfect competition?
The theory was developed almost simultaneously by the American economist Edward Hastings Chamberlin in his Theory of Monopolistic Competition (1933) and by the British economist Joan Robinson in her Economics of Imperfect Competition (1933).
Why is the kinked demand curve kinked?
A kinked demand curve occurs when the demand curve is not a straight line but has a different elasticity for higher and lower prices. The kink in the demand curve occurs because rival firms will behave differently to price cuts and price increases. …
What are the limitations of kinked demand curve?
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.
What is oligopoly market?
Oligopoly markets are markets dominated by a small number of suppliers. They can be found in all countries and across a broad range of sectors. Some oligopoly markets are competitive, while others are significantly less so, or can at least appear that way.
What are the distinguishing characteristics of oligopoly discuss the kinked demand curve model?
Oligopolistic market: Kinked demand curve model If the assumptions hold then: The firm’s marginal revenue curve is discontinuous (or rather, not differentiable), and has a gap at the kink. For prices above the prevailing price the curve is relatively elastic. For prices below the point the curve is relatively inelastic.
What is kinked demand theory in economics?
The Kinked-Demand curve theory is an economic theory regarding oligopoly and monopolistic competition. Kinked demand was an initial attempt to explain sticky prices.
How do oligopolies set prices?
Firms in an oligopoly set prices, whether collectively – in a cartel – or under the leadership of one firm, rather than taking prices from the market. Profit margins are thus higher than they would be in a more competitive market.
Is price and output under oligopoly indeterminate?
There is no general theory which can explain pricing and output decisions in all kinds of oligopoly situations. Thus, it is said that price and output under oligopoly is indeterminate. It is due to interdependence of other firms and absence of well defined goods. However, the price of a commodity is determined by its demand and supply.
What is the typical slope of a demand curve?
Thus, the slope of a demand curve is ∆P/∆Q. If the price falls we write -∆P/∆Q or if price rises demand falls, we write ∆P/∆Q. In either case, the slope becomes negative. The slope of a curve refers to its steepness indicating the rate at which it moves upwards or downwards.