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Zorluk: Çok zorOligopoly: Characteristics, Types, and Price Interdependence

In Paul Sweezy's kinked demand curve model for a non-collusive oligopoly, a firm observes that its price elasticity of demand is ∣Ed∣=2.5|E_d| = 2.5 for price increases above the prevailing market price P0P_0, but ∣Ed∣=0.4|E_d| = 0.4 for price cuts below P0P_0. Which of the following best explains the underlying behavioral assumption of rival firms and the resulting structure of the firm's marginal revenue curve?

  1. Rival firms ignore price increases but match price cuts, creating a sharp change in demand elasticity at P0P_0 that results in a vertical discontinuity (gap) in the marginal revenue curve at the prevailing output level.Cevap
  2. B
    Rival firms match price increases to protect profit margins but ignore price reductions, making demand relatively inelastic above P0P_0 and highly elastic below P0P_0.
  3. C
    Rival firms collude to fix prices at P0P_0, ensuring that the firm's marginal revenue remains equal to average revenue across all output levels despite changes in marginal cost.
  4. D
    Rival firms ignore both price increases and price cuts, causing the demand curve to remain smooth and linear with a continuous marginal revenue curve passing through P0P_0.

Cevap

Rival firms ignore price increases but match price cuts, creating a sharp change in demand elasticity at the prevailing price that results in a vertical discontinuity (gap) in the marginal revenue curve at the prevailing output level.
The correct option accurately captures the fundamental premise of Sweezy's kinked demand model: an oligopolist expects competitors to ignore price increases (making demand price-elastic above P0P_0) but match price reductions (making demand price-inelastic below P0P_0). This change in elasticity at P0P_0 creates a kink in the demand curve, which mathematically generates a discontinuous vertical gap in the marginal revenue curve at the existing output level.

Adım Adım Çözüm

1
Analyze rival firm reactions under non-collusive oligopoly according to Sweezy's hypothesis.
If a firm raises its price above P0P_0, rival firms will not follow, causing the price-raising firm to lose a significant market share (∣Ed∣=2.5>1|E_d| = 2.5 > 1, elastic segment). Conversely, if the firm lowers its price below P0P_0, rival firms immediately match the price cut to prevent losing customers, resulting in minimal extra market share gained by the firm (∣Ed∣=0.4<1|E_d| = 0.4 < 1, inelastic segment).
Establishing rival reaction patterns defines the shape of the firm's average revenue (demand) curve.
2
Examine the geometric relationship between the kinked demand curve and the marginal revenue (MR) curve.
Because the slope of the demand curve changes abruptly (kinks) at the prevailing output level corresponding to price P0P_0, the derived MR curve exhibits a vertical break or gap directly below the point of the kink.
Each linear or curved segment of demand produces its own MR line; the transition between the elastic upper portion and inelastic lower portion creates a vertical discontinuity.
3
Evaluate the economic implication of the vertical MR gap for price rigidity.
As long as the firm's marginal cost (MC) curve shifts within this vertical gap in the MR curve, the profit-maximizing condition MC=MRMC = MR continues to occur at the same output level and prevailing price P0P_0, explaining price stability (rigidity) in oligopolistic markets.
Synthesizes the behavioral assumptions with the structural characteristics of the kinked demand framework.

Anahtar Kavram

Kinked Demand Curve and Price Rigidity in Non-Collusive Oligopoly
Tahmini Süre:2m 0s
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Konular

Oligopoly: Characteristics, Types, and Price Interdependence

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