Kinked Demand Curve Oligopoly

Kinked Demand Curve Oligopoly - IB Economics Drogaris...

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IB Economics – Drogaris Theory of the Firm – Market Structures Gaith Kalai Oligopoly: Last Lesson Page 147; 2, 149; 2 2. a) Assuming the main aim of the firm is maintain a high market share and MC=MR. b) The motivation behind the kinked cure is the idea that in a probably oligopolistic or monopolistically competitive industry, firms will not raise their prices because even a small price increase will lose many customers due to the high elasticity of the product. However, even a large price decrease will gain only a few customers because such an action will begin a price war with other firms. The curve is therefore more price-elastic for price increases and less so for price decreases. Generally speaking, an oligopolistic firm would face a downward slope in the demand curve but the elasticity may depend on the reaction of rivals to changes in price and output. The kinked-demand curve contains two distinct segments--one for higher prices that is more elastic and one for lower prices that is less elastic. c) In an oligopoly, it is assumed that a profit-maximizing firm with some market power will set
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This document was uploaded on 10/26/2011 for the course PLIR 2050 at UVA.

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Kinked Demand Curve Oligopoly - IB Economics Drogaris...

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