|Series||Discussion paper / Harvard Institute of Economic Research -- no.463|
Often prices appear to be relatively stable in oligopolistic markets. There are different models to explain periods of price stability. The most predominant one being the kinked demand curve model, though this has received substantial criticism and economists have put forward other explanations. Price stability in a non-collusive oligopoly can be explained by the kinked oligopoly diagram. The kink exists because demand is more elastic at higher prices in comparison to low prices where demand is inelastic. To help explain how prices tend to stay stable I will use an example using three firms: firm A, firm B, and firm C. Question 14 of 19 / Points Prices in oligopolistic industries are predicted to fluctuate widely and frequently compared to other market structures. A. True B. False Answer Key: False Question 15 of 19 / Points The positive view of advertising suggests that it contributes to economic efficiency in the economy. is an (S,s) order policy and prices and inventory are strategic substitutes. Fixed ordering costs generate infrequent orders. Consequently, with strategic competition in prices, (S,s) inventory behavior together with demand uncertainty generates en-dogenous cyclical patterns in prices without any exogenous shocks. Hence, the devel-.
an effective remedy for the problem of oligopolistic pricing. Chapter C discusses the two major suggestions for resolving the oligopolistic problem: Posner’s economic-evidence approach and the deconcentration approach, as well as each suggestion’s major weaknesses. A. The Oligopoly Pricing Theories 1. The Basic Cournot ModelFile Size: KB. Oligopoly is the least understood market structure; consequently, it has no single, unified theory. Nevertheless, there is some agreement as to what constitutes an oligopolistic market. Three conditions for oligopoly have been identified. First, an oligopolistic market has only a . 6. (10 pts.; 2 pts each) You are the manager for Dunkin Donuts and know the following elasticities: η= η I = η xy1 = η xy2 = η is the price elasticity of demand for Dunkin Donuts (DD) glazed doughnuts, η xy1 is the cross elasticity of demand between DD glazed doughnuts and Krispy Kreme (KK) glazed doughnuts, η xy2 is the cross elasticity of demand . ADVERTISEMENTS: The Kinked Demand Curve Theory of Oligopoly! It has been observed that many oligopolistic industries exhibit an appreciable degree of price rigidity or stability. In other words, in many oligopolistic industries prices remain sticky or inflexible, that is, there is no tendency on the part of the oligopolists to change the price even if [ ].
The true demand curve for the oligopolistic market is dD and has the kink at the existing price P1. The demand curve has two linear curves, which are joined at price P. Associated with the kinked demand curve is a marginal revenue function. This is shown in Figure. Marginal Revenue for prices above the kink is given by MR1 and below the kink. Hence, in a PC market, any change in demand or supply will cause a change in the market price, thus prices tend to fluctuate. Prices in an oligopolistic firm. Prices fluctuate less in an oligopolistic market than in a perfectly competitive market due to the varying degree of barriers to entry in the respective market. If marginal costs fall in the gap of the MR curve P* will remain the profit maximizing price and Q* will be the profit maximzing output.. One of the points of the kinked demand curve model was that it provided an explanation for a behavior that economists were well aware of within oligopoly. It had been observed that firms in oligopolistic industries didn't change price and output often, . Econometrica, Vol. 56, No. 3 (May, ), Second, even in periods of technological and demand stability, oligopolistic markets are not always stable. Prices may fluctuate, sometimes wildly. Of course, one reason for these discrepancies between File Size: KB.