Atc formula with mc12/15/2023 If one of them raises the price, then it will lose market share to the others. The kinked-demand curve explains why firms in an oligopoly resist changes to price. Since firms maximize profit by producing that quantity where marginal cost = marginal revenue, the firms will not change the price of their product as long as the marginal cost is between MC 1 and MC 2, which explains why oligopolistic firms change prices less frequently than firms operating under other market models. Because there is a kink in the demand curve, there is a gap in the marginal revenue curve ( MR 1 - MR 2).If the firm lowers its price ( D2), then the other firms will match the decrease to avoid losing market share.If a firm raises its price ( D 1), but the others do not match the increase, then revenue will decline in spite of the price increase.The marginal cost curves of both scenarios will intersect the same quantity being produced by the oligopoly, represented by the vertical line in the graph therefore, there is no change in quantity produced as prices are lowered, as long as the change in marginal cost is within the marginal revenue gap. At lower prices, the marginal revenue curve drops downward creating a gap. Since the marginal revenue curve depends on prices, the marginal revenue curve is also kinked. This creates a kink in the demand curve, where the change in demand goes from very elastic at higher prices to inelastic at lower prices. This part of the demand curve is much more inelastic, since all the firms are acting in concert. If the firm lowers its price, then the other firms would surely follow, to prevent any loss of market share. This makes the demand curve more elastic, since as the firm raises its price, then many of its customers will buy from the other firms, lowering the revenue of the higher-priced firm. If one firm raises its price, the others probably will not follow, since that will allow them to take market share from the price changer. But what the other firms will actually do will probably depend on the direction of the price change. How will the other firms react? There are 2 possibilities: they can either match the price changes or ignore them. Kinked-Demand TheoryĬonsider a firm in an oligopoly that wants to change its price. There are 3 basic theories about oligopolistic pricing: kinked-demand theory, or non-collusive oligopoly, the cartel model, and the price leadership model. When prices do change, the firms generally move in the same direction and by the same magnitude in their price changes, which may be the result of collusion.In a stable economy, oligopolies' prices change much less frequently than under any other market model, such as pure competition, monopolistic competition, and even monopoly.There have been 2 prominent characteristics of oligopolies observed over the years.
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