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 is demand curve 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.

Why is it called kinked demand curve?

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. The kink occurs when both demand curves intersect each other.

How does kinked demand curve explain price rigidity in oligopoly?

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 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.

Y2 23) Oligopoly - Kinked Demand Curve

Who introduced kinked demand curve?

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

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.

Why is collusion desirable to oligopolistic firms?

Why is collusion desirable to oligopolistic firms? The possibility of price wars diminishes and profits are maximized.

What is the assumption of kinked demand curve?

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. The result is that for each firm the portion of the demand curve above the current price is elastic and the portion below the curve is inelastic.

What are the assumptions and criticism of kinked demand curve?

The assumptions of this model are:

(i) There are only a few firms in an oligopolistic market. (ii) The firms are producing close-substitute products. (iii) The quality of the products remains constant and the firms do not spend on advertising.

What is oligopoly in economics?

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 is oligopoly with example?

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.

What are the two types of oligopoly?

1. Syndicated Oligopoly: When only a very small group or an individual firm controls the sale of products, it is a case of Syndicated Oligopoly. 2. Organised Oligopoly: When all the firms work together to fix output, sale, prices, etcThe Market is called Organised Oligopoly Market.

What are the 5 characteristics of an oligopoly?

Oligopoly characteristics include high barriers to new entry, price-setting ability, the interdependence of firms, maximized revenues, product differentiation, and non-price competition.

What are the four conditions of oligopoly?

Which is the best example of oligopoly?

OPEC is the best example of oligopoly.

What are the three main features of an oligopoly?

OLIGOPOLY, CHARACTERISTICS: The three most important characteristics of oligopoly are: (1) an industry dominated by a small number of large firms, (2) firms sell either identical or differentiated products, and (3) the industry has significant barriers to entry.

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 oligopoly classification?

On the basis of agreement, oligopoly is classified as Collusive Oligopoly and Non-collusive Oligopoly. A collusive oligopoly refers to that market situation where the firms of the industry follow a common policy of pricing.

What are the methods of oligopoly?

What is collusion oligopoly?

Collusion occurs when oligopoly firms make joint decisions, and act as if they were a single firm. Collusion requires an agreement, either explicit or implicit, between cooperating firms to restrict output and achieve the monopoly price.

What is the effect of collusion in an oligopoly market?

Collusion between firms is harmful to consumers. This is because firms collude to raise prices, as mentioned earlier, resulting in the price level seen below. This reduces the consumer surplus available, reducing the welfare of individuals.

What are the two types of collusion?

Collusion between firms can be observed in two different forms: explicit collusion and implicit collusion.

What is meant by 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.