What is king demand curve?

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 does the king demand curve explain?

It illustrates the interdependent behaviour of firms in oligopolistic market structures. The kinked demand curve illustrates the interdependence of firms in an oligopoly market. The reason why there is a kink in the demand curve is that there are two demand curves: one that is inelastic and one that is elastic.

What is price rigidity and kinked demand curve?

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.

Why oligopoly demand curve is kinked?

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 causes a kinked demand curve?

The reason why there is a kink in the demand curve is that there are two demand curves: one that is inelastic and one that is elastic. The kink occurs when both demand curves intersect each other. As you can see in Figure 1 below, at the kink, the MR curve is vertical.

The Kinked Demand Curve: Econ Concepts in 60 Seconds

What means oligopoly?

An oligopoly is a market characterized by a small number of firms who realize they are interdependent in their pricing and output policies. The number of firms is small enough to give each firm some market power.

What is oligopoly explain Sweezy's kinked demand curve & price rigidity?

American economist Sweezy came up with the kinked demand curve hypothesis to explain the reason behind this price rigidity under oligopoly. According to the kinked demand curve hypothesis, the demand curve facing an oligopolist has a kink at the level of the prevailing price.

What are types of oligopoly?

What is Cournot equilibrium?

The basic Cournot assumption is that each firm chooses its quantity, taking as given the quantity of its rivals. The resulting equilibrium is a Nash equilibrium in quantities, called a Cournot (Nash) equilibrium. Context: The Cournot model provides results which are of some importance to industrial economics.

What is price rigidity?

Price rigidity is the price of the product fixed after deliberations and negotiations by the oligopolistic firms, to which they generally stick with a view to avoid any sort of price war.

What is price rigidity under oligopoly?

Firms under oligopoly are in a position to influence prices. However, they try to avoid price competition for fear of a price war. They follow the policy of price rigidity. Price rigidity refers to a situation in which the price remains constant despite changes in demand and supply conditions.

What is the shape of MR curve in kinked demand curve?

The upper section of the kinked-demand curve has a higher price elasticity than the lower part. 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.

What kind of demand curve does a monopoly have?

In Panel (b) a monopoly faces a downward-sloping market demand curve. As a profit maximizer, it determines its profit-maximizing output. Once it determines that quantity, however, the price at which it can sell that output is found from the demand curve.

What is an example of an oligopoly?

Oligopoly arises when a small number of large firms have all or most of the sales in an industry. Examples of oligopoly abound and include the auto industry, cable television, and commercial air travel. Oligopolistic firms are like cats in a bag.

Why are prices sticky in oligopoly?

The theory of oligopoly suggests that, once a price has been determined, will stick it at this price. This is largely because firms cannot pursue independent strategies.

What is open and closed oligopoly?

An open Oligopoly is the market situation wherein firm can enter into the industry any time it wants, whereas, in the case of a closed Oligopoly, there are certain restrictions that act as a barrier for a new firm to enter into the industry.

What is the difference between monopoly and oligopoly?

A monopoly occurs when a single company that produces a product or service controls the market with no close substitute. In an oligopoly, two or more companies control the market, none of which can keep the others from having significant influence.

What is an monopolistic?

A monopolistic market structure has the features of a pure monopoly, where a single company fully controls the market and determines the supply and price of a product or service. Hence, a monopolistic market is a non-competitive market.

What are the basic assumptions of Sweezy's model of oligopoly?

Sweezy (1939) proposed the model as an explanation of rigid oligopoly prices, which were taken as an empirical observation (see also Hall and Hitch 1939). The basic assumption underlying the kinked demand curve is that rivals will not follow an attempted increase in price by one of the firms but will follow a decrease.

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.

What is duopoly market?

A duopoly is a market in which two firms sell a product to a large number of consumers. Each consumer is too small to affect the market price for the product: that is, on the buyers' side, the market is competitive.

What is the difference between monopoly and monopolistic competition?

A monopoly is the type of imperfect competition where a seller or producer captures the majority of the market share due to the lack of substitutes or competitors. A monopolistic competition is a type of imperfect competition where many sellers try to capture the market share by differentiating their products.

What is a monopoly market structure?

A monopolistic market is a market structure with the characteristics of a pure monopoly. A monopoly exists when one supplier provides a particular good or service to many consumers. In a monopolistic market, the monopoly (or dominant company) exerts control over the market, enabling it to set the price and supply.

Who proposed kinked demand?

1. Sweezy's Kinked Demand Curve Model: The kinked demand curve of oligopoly was developed by Paul M. Sweezy in 1939.