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A kink in an otherwise linear demand curve. Note how marginal costs can fluctuate between MC1 and MC3 without the equilibrium quantity or price changing. The Kinked-Demand curve theory is an economic theory regarding oligopoly and monopolistic competition. Kinked demand was an initial attempt to explain sticky prices.
In order to distinguish themselves well, these firms can compete in price, but more often, oligopolistic firms engage in non-price competition because of their kinked demand curve. In the kinked demand curve model, the firm will maximize its profits at Q,P where the marginal revenue (MR) is equal to the marginal cost (MC) of the firm. Hence, a ...
Sweezy did pioneering work in the fields of expectations and oligopoly in these years, introducing for the first time the concept of the kinked demand curve in the determination of oligopoly pricing. [3] Harvard published Sweezy's dissertation, Monopoly and Competition in the English Coal Trade, 1550–1850, in 1938.
However, there are a series of simplified models that attempt to describe market behavior under certain circumstances. Some of the better-known models are the dominant firm model, the Cournot–Nash model, the Bertrand model and the kinked demand model. As different industries have different characteristics, oligopoly models differ in their ...
Generally, when a firm operating in an oligopolistic market adjusts prices, other firms in the industry will be directly impacted. The graph below depicts the kinked demand curve hypothesis which was proposed by Paul Sweezy who was an American economist. [29] It is important to note that this graph is a simplistic example of a kinked demand curve.
One variation of this traditional theory is the theory of kinked demand. Firms face a kinked demand curve if, when one firm decreases its price, other firms are expected to follow suit to maintain sales. When one firm increases its price, its rivals are unlikely to follow, as they would lose the sales gains they would otherwise receive by ...
In dominant firm price leadership, the price leader is the biggest firm. In barometric firm price leadership , the most reliable firm emerges as the best barometer of market conditions, or the firm could be the one with the lowest costs of production, leading other firms to follow suit.
Sometimes firms do not have enough capacity to satisfy all demand. This was a point first raised by Francis Edgeworth [5] and gave rise to the Bertrand–Edgeworth model. Integer pricing. Prices higher than MC are ruled out because one firm can undercut another by an arbitrarily small amount.