oligopoly kinked demand curve

Question 1

what is an oligopoly

Answer 1

-few firms that dominate market: 7 firms with 70%, high conc ratio
-differentiated goods: price makers
-high barriers to entry and exit
-interdependence (rival firms actions)
-price rigidity
-non-price comp
-profit max not sole objective

Question 2

examples of oligopoly

Answer 2

-pepsi and coke
-OPEC
-supermarket industry UK

Question 3

why kinked demand curve

Answer 3

INTERDEPENDENCE

1)firms don’t want to change price

-at p1 there are differing elasticities of demand (above elastic, below inelastic), demand will fall proportionately greater than the rise in price and vice versa
-why: other firms reacting, look to protect market share

2)firms don’t need to change their price
-MR falls and there is a gap and returns to elasticity
-cost increase, idea is as long as costs change within gap, if they are profit maximiser they will charge price at p1

Question 4

graph of oligopoly

Answer 4

-ar changes elastic
-mr twice as steep then gap then same again
-MC in the gap

Question 5

conclusions of kinked demand curve model

Answer 5

-could be price competition, firms may still try and reduce price: price wars
-non-price competition
-temptation to collude