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OLIGOPOLY PRICE RIGIDITY AND LIMITATIONS KINKED DEMAND CURVE MODEL MICROECONOMICS ISI ,DSE ,JNU ,UPSC ,IIT ,SSC CGL ,BSC ,CFA VISIT OUR WEBSITE https://www.souravsirclasses.com/ FOR COMPLETE LECTURES / STUDY MATERIALS /NOTES /GUIDENCE / PAST YEAR SOLVED +SAMPLE PAPAERS /TRICKS /MCQ / SHORT CUT/ VIDEO LECTURES /LIVE + ONLINE CLASSES GIVE US A CALL / WHAST APP AT 9836793076 Also find us at…. BLOGSPOT http://souravdas3366.blogspot.com/ SLIDES ON COURSES https://www.slideshare.net/Souravdas31 TWITTER https://twitter.com/souravdas3366 FACEBOOK https://www.facebook.com/Sourav-Sirs-... LINKED IN https://www.linkedin.com/in/sourav-da... GOOGLE PLUS https://plus.google.com/+souravdassou... Oligopoly Models: Sweezy’s Kinked Demand Curve Model and Collusion Model Article Shared by Under oligopoly, prices and output are indeterminate. Moreover, organizations are mutually dependent on each other in setting the pricing policy. Therefore, economists found it extremely difficult to propound any specific theory for price and output determination under oligopoly. In the words of Maurice, “there is no theory of oligopoly in the sense that there is a theory of perfect competition or of monopoly. There is no unique general solution but merely many different behavioral models, each of which reaches a different solution.” Thus, the economists have developed various analytical models based on different behavioral assumptions for determining price and output under oligopoly. Demand Curve Model: The kinked demand curve of oligopoly was developed by Paul M. Sweezy in 1939. Instead of laying emphasis on price-output determination, the model explains the behavior of oligopolistic organizations. The model advocates that the behavior of oligopolistic organizations remain stable when the price and output are determined. This implies that an oligopolistic market is characterized by a certain degree of price rigidity or stability, especially when there is a change in prices in a downward direction. For example, if an organization under oligopoly reduces the price of products, the competitor organizations would also follow it and neutralize the expected gain from the price reduction. On the other hand, if the organization increases the price, the competitor organizations would also cut down their prices. In such a case, the organization that has raised its prices would lose some part of its market share. The kinked demand curve model seeks to explain the reason of price rigidity under oligopolistic market situations. Therefore, to understand the kinked demand curve model, it is important to note the reactions of rival organizations on the price changes made by respective oligopolistic organizations. There can be two possible reactions of rival organizations when there are changes in the price of a particular oligopolistic organization. The rival organizations would either follow price cuts, but not price hikes or they may not follow changes in prices at all. A kinked demand curve represents the behavior pattern of oligopolistic organizations in which rival organizations lower down the prices to secure their market share, but restrict an increase in the prices. Followings are the assumption of a kinked demand curve: i. Assumes that if one oligopolistic organization reduces the prices, then other organizations would also cut their prices ii. Assumes that if one oligopolistic organization increases the prices, then other organizations would not follow increase in prices Market equilibrium Equilibrium Consumers and producers react differently to price changes. Higher prices tend to reduce demand while encouraging supply, and lower prices increase demand while discouraging supply. Economic theory suggests that in a free market there will be a single price which brings demand and supply into balance, called equilibrium price. Both parties require the scarce resource that the other has and hence there is a considerable incentive to engage in an exchange. Price discovery In its simplest form, the constant interaction of buyers and sellers enables a price to emerge over time. It is often difficult to appreciate this process because the retail prices of most manufactured goods are set by the seller. The buyer either accepts the price. While an individual consumer in a shopping mall might haggle over the price, this is unlikely to work, and they will believe they have no influence over price. However, if all potential buyers haggled, and none accepted the set price, then the seller would be quick to reduce the price. In this way, collectively, buyers have influence over market price. Eventually, a price is found which enables an exchange to take place. A rational seller would take this a step further, and gather as much market information as possible in an attempt to set a price which achieves a given number of sales at the outset.
