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.

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 a kinked 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.

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.

Who first used kinked demand curve to explain price rigidity?

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

Y2 23) Oligopoly - Kinked Demand Curve

Why oligopoly 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.

Why there is price rigidity in oligopoly?

Why the price rigidity? As can be seen above, a firm cannot gain or lose by changing its price from the prevailing price in the market. In both cases, there is no increase in demand for the firm which changes its price. Hence, firms stick to the same price over time leading to price rigidity under oligopoly.

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.

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 explain Sweezy's kinked demand curve & 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 the definition of kinked?

n. 1. A tight curl, twist, or bend in a length of thin material, as one caused by the tensing of a looped section of wire. 2. A painful muscle spasm, as in the neck or back; a crick.

What is price rigidity microeconomics?

Price stickiness, or sticky prices, is the resistance of market price(s) to change quickly, despite shifts in the broad economy suggesting a different price is optimal. "Sticky" is a general economics term that can apply to any financial variable that is resistant to change.

Who gave the concept of price rigidity?

Carlton (1986. (1986). The rigidity of prices.

What is meant by rigidity in macroeconomics?

In macroeconomics, rigidities are real prices and wages that fail to adjust to the level indicated by equilibrium or if something holds one price or wage fixed to a relative value of another.

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 example of monopoly?

A monopoly is a firm who is the sole seller of its product, and where there are no close substitutes. An unregulated monopoly has market power and can influence prices. Examples: Microsoft and Windows, DeBeers and diamonds, your local natural gas company.

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.

In what way does the theory of the kinked demand curve explain price stability in an oligopoly industry?

The model of the kinked demand curve suggests prices will be stable. Firms don't want to increase prices because they will see a sharp fall in demand. Firms don't want to cut prices because they will start a price war, where they don't gain market share, but do get lower prices and lower revenue.

Which of the following explains price inflexibility in the kinked demand model?

The kinked-demand curve explains price inflexibility but not price itself. Advertising may decrease economic efficiency if it: A.

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.

Who introduced kinked demand curve?

The two seminal papers on kinked demand were written nearly simultaneously in 1939 on both sides of the Atlantic. Paul Sweezy of Harvard College published "Demand Under Conditions of Oligopoly." Sweezy argued that an ordinary demand curve does not apply to oligopoly markets and promotes a kinked demand curve.

Which market has price rigidity?

Hence, under oligopoly, price rigidity is often predicted.

What is a kink in a graph?

A kink is a zig-zag line that is usually drawn in the x-axis near the origin when the scale on the axis does not start from zero. A kink denotes the missing divisions.

What is a kink in physics?

Kinks are deviations of a dislocation defect along its glide plane. In edge dislocations, the constant glide plane allows short regions of the dislocation to turn, converting into screw dislocations and producing kinks.