What is kinked demand curve theory?
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.
Who developed kinked demand curve?
Paul Sweezy
The kinked demand curve theory is a theory about oligopolistic and monopolistic competition. It was brought forward by Paul Sweezy as the first attempt to explain sticky prices.
Why do some economists criticize the kinked demand theory?
Kinked demand curve model 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.
What is Sweezy oligopoly model?
The Sweezy model, or the kinked demand model, shows that price stability can exist without collusion in an oligopoly. Two firms “squabble” over a market. On the other hand, whenever the price of one firm fell, its rival would reduce its own price too to maintain its market share.
What are positive effects of large oligopolists advertising?
Benefits to oligopolies from collusion: It increases profits. It possibly prohibits the entry of new rivals. It reduces price uncertainty.
Who introduced imperfect competition?
The theory was developed almost simultaneously by the American economist Edward Hastings Chamberlin in his Theory of Monopolistic Competition (1933) and by the British economist Joan Robinson in her Economics of Imperfect Competition (1933).
What is kinked demand curve How does it explain price rigidity?
The kinked demand curve model seeks to explain the reason of price rigidity under oligopolistic market situations. A kinked demand curve represents the behavior pattern of oligopolistic organizations in which rival organizations lower down the prices to secure their market share, but restrict an increase in the prices.
What is kinked demand curve explain its significance?
A kinked demand curve occurs when the demand curve is not a straight line but has a different elasticity for higher and lower prices. This model of oligopoly suggests that prices are rigid and that firms will face different effects for both increasing price or decreasing price.
What is game theory in oligopoly?
“Game theory is the study of how people behave in strategic situations. By ‘strategic’ we mean a situation in which each person, when deciding what actions to take, must consider how others might respond to that action.” This means that firms in oligopoly markets are playing a ‘game’ against each other.
What was the original purpose of the kinked demand curve?
The kinked demand curve (Sweezy, 1939; Hall and Hitch, 1939) has been one of the staples of oligopoly theory. It was originally formulated as a theory of price rigidity. A –rm conjectures that its rivals will match its price if it reduces the price, but will not match its price if it initiates a price increase.
How is the kinked demand theory of oligopoly determined?
Kinked-Demand Theory of Oligopoly. The market demand curve that each oligopolist faces is determined by the output and price decisions of the other firms in the oligopoly; this is the major contribution of the kinked‐demand theory. The kinked‐demand theory, however, is considered an incomplete theory of oligopoly for several reasons.
What happens when demand is kinked in a price war?
Because there is a ‘price war’ demand for a firm is price inelastic – there is a smaller percentage rise in demand. If demand is inelastic and price falls, then revenue will fall. If the kinked demand curve is true, the firm has no incentive to raise price or to cut price.
When does the demand curve become less elastic?
The oligopolist’s market demand curve becomes less elastic at prices below P because the other oligopolists in the market have also reduced their prices. When oligopolists follow each others pricing decisions, consumer demand for each oligopolist’s product will become less elastic (or less sensitive)…