What is kinked demand curve model of oligopoly?
What is kinked demand curve model of oligopoly?
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 kinked demand curve How does it help in explaining price rigidity under oligopoly?
The kinked-demand curve model (also called Sweezy model) posits that price rigidity exists in an oligopoly because an oligopolistic firm faces a kinked demand curve, a demand curve in which the segment above the market price is relatively more elastic than the segment below it.
What are the basic assumptions of kinked demand curve model?
The basic assumption underlying the kinked demand curve is that rivals will not follow an attempted increase in price by one of the firms but will follow a decrease. The result is that for each firm the portion of the demand curve above the current price is elastic and the portion below the curve is inelastic.
What is Sweezy 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. Observers have noticed that whenever the price of one firm was increased, the price of the other firm remained constant.
Who is explained kinked demand model?
In came Sweezy, an American economist with his kinked demand curve theory. Then, economists and industrialists cheered alike. Sweezy said that every firm has two market demand curves for its product. At high prices, the firm faces a relatively elastic market demand curve.
Which of the following has kinked demand curve?
Therefore, the Kinked demand curve is a characteristic of Oligopoly. Impact of price rise: If a firm increases the price, then it becomes more expensive than rivals and therefore, consumers will switch to its rivals.
What are the oligopoly models?
An oligopoly is defined as a market structure with few firms and barriers to entry. Since there are a small number of firms in an oligopoly, each firm’s profit level depends not only on the firm’s own decisions, but also on the decisions of the other firms in the oligopolistic industry.
How many models of oligopoly are there?
Oligopoly markets are markets in which only a few firms compete, where firms produce homogeneous or differentiated products and where barriers to entry exist that may be natural or constructed. There are three main models of oligopoly markets, each consider a slightly different competitive environment.
What is oligopoly determine price and output under oligopoly with the help of kinked demand curve model?
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.