Why the demand curve is kinked under non-collusive oligopoly?
The kink in the demand curve stems from the asymmetric behavioural pattern of sellers. If a seller increases the price of his product, the rival sellers will not follow him so that the first seller loses a considerable amount of sales. In other words, every price increase will go unnoticed by rivals.
What is kinked demand curve under 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.
What is a non-collusive oligopoly?
A Collusive Oligopoly is one in which the firms cooperate and not compete, with one another with respect to price and output. A Non-Collusive Oligopoly is one wherein each firm in the industry pursues a price and output policy that is independent of competitors.
Why is the kinked demand curve kinked?
A kinked demand curve occurs when the demand curve is not a straight line but has a different elasticity for higher and lower prices. The kink in the demand curve occurs because rival firms will behave differently to price cuts and price increases. …
Why is oligopoly graph 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?
Which of the following is a feature of non-collusive oligopoly?
Common characteristics of non-collusive oligopoly is that they assume certain pattern of reaction of competitors, in each period and despite the fact that the expected reaction does not in fact materialize , the firm continue to assume that the initial assumption holds.
What are the most popular non-collusive oligopoly models?
In the following sections, we would see how equilibrium is arrived at in the important models of non-collusive oligopoly—Cournot model of duopoly, Bertrand model, Stackelberg model, Edgeworth, Chamberlin and the Kinked Demand curve analysis of Sweezy.
Why oligopoly has a kinked demand curve?
What is kinked demand theory in economics?
The Kinked-Demand curve theory is an economic theory regarding oligopoly and monopolistic competition. Kinked demand was an initial attempt to explain sticky prices.
How do oligopolies set prices?
Firms in an oligopoly set prices, whether collectively – in a cartel – or under the leadership of one firm, rather than taking prices from the market. Profit margins are thus higher than they would be in a more competitive market.
Is price and output under oligopoly indeterminate?
There is no general theory which can explain pricing and output decisions in all kinds of oligopoly situations. Thus, it is said that price and output under oligopoly is indeterminate. It is due to interdependence of other firms and absence of well defined goods. However, the price of a commodity is determined by its demand and supply.
What is the typical slope of a demand curve?
Thus, the slope of a demand curve is ∆P/∆Q. If the price falls we write -∆P/∆Q or if price rises demand falls, we write ∆P/∆Q. In either case, the slope becomes negative. The slope of a curve refers to its steepness indicating the rate at which it moves upwards or downwards.