The Oligopolist sets price to P
When the curve is relatively elastic,
if a firm in the
increases the price
, other firms will not follow because the resulting fall in demand is
greater than the proportionate change in price. The firm loses too much demand to attract other
firms to follow.
When the curve is relatively inelastic
, if a firm
lowers the price
, other firms will follow
because they benefit from the resulting increase in demand. Even though the resulting increase
in demand is lower than the fall in price, firms benefit because consumers ‘shop around’ for
lower prices; if Tesco are selling a notebook for £1 and Asda are selling a notebook for 80p,
provided that Asda is just as accessible as Tesco, the consumer may decide to shop at Asda
instead. This is under the assumption that the oligopoly market competes on price. If this
price rigidity a discontinuity
exists along a vertical line above output Q1 between the
two marginal revenue curves associated with the relatively elastic and inelastic demand curves.
Costs can rise or fall within a certain range without causing a profit-maximizing Oligopolistic
to change either the price or output. At output Q1 and price P1 MC=MR.
Note how marginal costs can fluctuate between MC1 and MC3 without the equilibrium
or price changing.
Oligopoly Competition Market Structure apply in business activity:-
are responsible for the 90% of the water produced in Orange
County. If Company B raises its prices, consumers most likely will shift to Company A for
their water provision. But, if Company A raises its prices too, then both Companies will control
the entire water market through their pricing setting ability.