Oligopolies - Kinked Demand Flashcards
What are the characteristics of oligopolies?
Few firms dominating the markers. Theres a high concentration ratio where no more than 7 firms have 70% market share.
Differentiated goods so firms are price makers
High barriers to exit/entry. EG: Startup costs, brand loyalty
Interdependence. Means oligopolies will make decisions based on actions/reactions of other rivals. As a result theres price rigidity.
Non price competition. Firms will compete in terms of ads, branding, etc.
Firms will pursue any objective since they aim to get as much market share as possible.
Explain why on the kinked demand graph, firms dont want to change price. And what does this show us.
Firms will produce where the demand kinks. Above this point, theres more price elasticity and below theres more price inelasticity.
If firm raises prices, qd will decrease proportionately more than the increase in price. This is because due to interdependence, other firms wont follow this action, since they want market share. They will stay put and undercut their rivals. The firms that raised price will suffer. Lost shares and revenue.
If firm drops price, qd will increase proportionately less than the reduction in price. Price inelasticity here. Firms will follow this action and drop their prices as well in order to protect market share. A price war occurs. The outcome is less profits for firms but not much changes to market share.
This shows us price rigidity where prices are sticky.
Explain why on the kinked demand graph, firms dont need to change price.
Due to the gap in MR, any changes in cost that are within this vertical gap, will result in the same price and quantity if the firm is a profit maximiser. They will remain in the same position. Therefore at this point firms dont need to change their price.
What are some conclusions we come to about oligopolies?
Price competition.
There can be price comp in some cases. Firms may lower prices to gain share but this starts a price war.
Non-price competition.
There will be a lot of this since prices tend to be sticky and rigid. It makes more sense to compete in other things other than price.
Temptation to collude.
Interdependence is annoying so firms are tempted to collude so they can grow. When they do this they can basically act like a monopoly and fix prices.
