What is kinked demand curve model?
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.
What is Sweezy oligopoly model?
The Sweezy model, or the kinked demand model, shows that price stability can exist without collusion in an oligopoly. Two firms “squabble” over a market. On the other hand, whenever the price of one firm fell, its rival would reduce its own price too to maintain its market share.
What are the limitations of kinked demand curve 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.
How can the kinked demand curve model explain price rigidity?
The kinked-demand curve model (also called Sweezy model) posits that price rigidity exists in an oligopoly because an oligopolistic firm faces a kinked demand curve, a demand curve in which the segment above the market price is relatively more elastic than the segment below it.
What is Sweezy kinked demand curve?
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. The kinked demand curve model seeks to explain the reason of price rigidity under oligopolistic market situations.
Why demand curve is kinked in oligopoly?
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.
What price leadership avoids?
Firstly, rivalry between several large firms in an industry may make it impossible to accept one among them as the leader. Secondly, followers avoid the continuous recalculation of costs, as economic conditions change.
Why oligopoly curve is kinked?
How does the kinked demand curve explain price rigidity in oligopoly What are the shortcomings of the kinked demand model?
d) What are the shortcomings of the kinked-demand model? Price rigidity in an oligopoly is explained by the kinked-demand curve because firms will not change their price since they fear that it will decrease their total revenue and profits.
What is the reason for the kinked shape of the kinked demand curve?