The demand curve will be kinked if rival oligopolists

Kinked Demand Curve: The kinked demand model is a model of oligopoly in which the demand curve facing each individual firm has a “kink” in it. The kink follows from the assumption that competing firms will match a price cut from one of them, but will not follow if a single firm raises price. The kinked demand curve model revolves around how a firm perceives its demand curve. One problem that arises is that a firm cannot readily observe its demand curve with any degree of certainty, so it must form expectations about how consumers will react to a price change. The kinked demand curve is shown in Figure \(\PageIndex{3}\), where the different reactions of other firms leads to a kink in the demand curve at the prevailing price \(P^*\). Figure \(\PageIndex{3}\): Kinked Demand Curve Model. In the kinked demand curve model, \(MR\) is discontinuous, due to the asymmetric nature of the demand curve.The kinked demand curve explains the observation that in oligopoly markets? Prices may not change even in the face of cost increases. The profit-maximizing rate of output in figure 24.1 is? Jul 04, 2019 · Price-rigidity and Paul Sweezy’s Kinked Demand curve contd. If the oligopoly firm reduce the price bellow the prevailing price (at kink), his rivals will follow him and accordingly lower their price. Very little increase in the sale can be obtained by a reduction in price by the . oligopolist.

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This situation is shown in Figure 1 where KD 1 is the elastic demand curve and MD is the less elastic demand curve. The oligopolies’ demand curve is the dotted kinked KPD. The reason is quite simple. If a seller reduces the price of his product, his rivals also lower the prices of their products so that he is not able to increase his sales.

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This causes the oligopolist’s demand curve to be kinked (D2eD1) and the marginal-revenue curve to have a vertical break, or gap (fg). Because any shift in marginal costs between MC 1 and MC 2 will cut the vertical (dashed) segment of the marginal-revenue curve, no change in either price, P 0, or output, Q 0 , will result from such a shift. In the kinked demand curve model, starting from the initial price, the demand curve assumed to face a firm is relatively _____ for price increases and relatively... View Answer True or False:1.


8For instance, Gul (1987) shows that when durable-goods oligopolists can make frequent offers, unlike the monopolist, they can improve their ability to commit to high prices and obtain close to full-commitment monopoly profits. 9A considerable amount of study has also focused on how product lines should be chosen to soften second- What assumptions about a rival's response to price changes underlie the kinked-demand curve for oligopolists? Why is there a gap in the oligopolist's marginal-revenue curve? How does the kinked demand curve explain price rigidity in oligopoly?

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