What is oligopolistic competition?
a competitive situation in which there are only a few sellers (of products that can be differentiated but not to any great extent); each seller has a high percentage of the market and cannot afford to ignore the actions of the others.
What are the positive effects of large oligopolists advertising?
What are the positive effects if large oligopolists do not advertise? The lack of manipulative information would reduce the chance of a firm becoming a monopoly. A reduction in advertising would help lower prices and possibly increase product output.
Who gave concept of kinked demand curve?
American economist Sweezy came up with the kinked demand curve hypothesis to explain the reason behind this price rigidity under oligopoly. According to the kinked demand curve hypothesis, the demand curve facing an oligopolist has a kink at the level of the prevailing price.
Do oligopolists use advertising?
Many oligopolistic markets are characterised by non-price competition. In such markets, advertising is the main competitive mechanism.
Why is the long run demand curve horizontal?
The demand curve for an individual firm is thus equal to the equilibrium price of the market. The horizontal demand curve indicates that the elasticity of demand for the good is perfectly elastic. This means that if any individual firm charged a price slightly above market price, it would not sell any products.
How do you derive the short-run supply curve?
The firm always makes production decisions based on the Marginal Cost curve. It always produces where MC(Q)=P. Thus, the short run supply curve is the formula for the MC function….Set MC=AVC and solve.
- MC=10+Q=10+. 5Q—>minimized at Q=0.
- At Q=0, AVC=10.
- Thus the cutoff price at which to temporarily shut down is P=10.
Why long-run supply curve is horizontal?
The long-run supply curve in an industry in which expansion does not change input prices (a constant-cost industry) is a horizontal line. It will induce entry or exit in the long run so that price will change by enough to leave firms earning zero economic profit.
What is the nature of demand curve under perfect competitive market?
A perfectly competitive firm’s demand curve is a horizontal line at the market price. This result means that the price it receives is the same for every unit sold. The marginal revenue received by the firm is the change in total revenue from selling one more unit, which is the constant market price.
What is the demand curve for monopolistic competition?
A monopolistic competitive firm’s demand curve is downward sloping, which means it will charge a price that exceeds marginal costs. The market power possessed by a monopolistic competitive firm means that at its profit maximizing level of production there will be a net loss of consumer and producer surplus.
What is the most significant example of an international cartel?
The organization of petroleum‐exporting countries (OPEC) is perhaps the best‐known example of an international cartel; OPEC members meet regularly to decide how much oil each member of the cartel will be allowed to produce.
Why is the demand curve for a perfect competition horizontal?
A perfect elasticity of demand refers to a situation where any increase in price forces the demand to drop. Therefore, perfect competition firms will exhibit a horizontal line in its individual demand curve, because exact substitutes are available in the market.
How does the kinked demand curve model work?
In such an environment, each firm has significant market power. Hence, firms must consider possible actions of their competitors in taking their pricing decisions. The kinked demand model postulates that when a firm increases it price, its competitors do not change their prices.
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.
Why is the kink at the prevailing price level?
The kink is formed at the prevailing price level because the segment of the demand curve above the prevailing price level is highly elastic and the segment of the demand curve below the prevailing price level is inelastic. A kinked demand curve dD with a kink at point K has been shown in Fig. 29.4.
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.