At Qc, firms made normal profit. Now, this output will be allocated among the organizations. However, Hall and Hitch version runs into difficulty when the average cost curve of the various firms in an oligopolistic industry is different. Cambridge: Cambridge University Press, 1994. The price P will tend to remain stable or rigid as every member of the oligopoly will not see any gain in lowering it or in increasing it.
For example, if an organization under oligopoly reduces price of products, the competitor organizations would also follow it and neutralize the expected gain from the price reduction. The model does not explain how these prices have been determined. Collusion is illegal and firms can be fined. Kinked Demand Curve The Kinked demand curve suggests firms have little incentive to increase or decrease prices. If the cost of production rises along with a shift in the demand curve, then also, profit maximisation may not require the firm to change the price of its product. Because every firm is cutting prices so they receive no increase in market share. Therefore, economists found it extremely difficult to propound any specific theory for price and output determination under oligopoly.
When oligopolists follow each others pricing decisions, consumer demand for each oligopolist's product will become less elastic or less sensitive to changes in price because each oligopolist is matching the price changes of its competitors. In fact each will gain in sales to the extent of a proportionate share in the increase in total demand. Very small increase in sales of an oligopolist following his reduction in price below the prevailing level means that the demand for him is inelastic below the prevailing price. Kinked demand curve model The model of the kinked demand curve suggests prices will be stable. In other words, cartel can be defined as a group of organizations that together make pricing and output decisions. From what has been said above, it is easy to see why an oligopolist confronting a kinked demand curve will have no incentive to raise its price or to lower it.
The firm will be worse off. There can be two possible reactions of rival organizations when there are changes in the price of a particular oligopolistic organization. On the other hand, under oligopoly without product differentiation, when a firm raises its price, all its customers would leave it so that demand curve facing an oligopolist producing homogeneous product may be perfectly elastic. This enables the industry to become more profitable. Price wars Firms in oligopoly may still be very competitive on price, especially if they are seeking to increase market share.
This maximises profit for the industry. However, if firms collude, they can agree to restrict industry supply to Q2, and increase the price to P2. But there is a good chance that the price of the product of a firm would be consistent with its goal of profit maximisation. Because of the competitors quickly following the reduction in price by an oligopolist, he will gain in sales only very little. Assumes that rival organizations only follow price decrease, which does not hold true empirically. Peck, Competition in the Aluminium Industry 1945-58, Cambridge: Harvard University Press, 1961. Thirdly, the rival organizations may follow price cut, but not price hike.
Why Price Rigidity under Oligopoly? Sweezy, an American economist, and by Hall and Hitch, Oxford economists. Why does Swisscom have very little incentive to decrease its prices, and also a strong incentive not to raise its prices? There is no unique general solution but merely many different behavioral models, each of which reaches a different solution. Collusion Model-The Cartel : In oligopolistic market situations, organizations are indulged in high competition with each other, which may lead to price wars. As a result, the upper segment of the demand curve becomes more elastic, that is, it becomes more nearly horizontal. On the other hand, if it goes on decreasing its price from p 1, its rivals also would be decreasing their prices according to assumption v. In such a case, consumers would switch to rivals, which would lead to fall in the sales of the oligopolistic organization.
As either an employed executive or independent consultant, I have since helped several other supply chain solution providers. We will look at two firms, Swisscom and Orange, which provide cell service to customers in Switzerland. This is reinforced in situations where the customers understand the cost model. In the above example, the industry was initially competitive Qc and Pc. Link to this page: kinked demand curve.
This is because, in this case, as the firm decreases or increases the price, its product does not become neither relatively cheaper nor dearer. His sales will increase not at the expense of his competitors but because of the rise in total quantity demanded due to the reduction in price of the good. Following are the assumption of a kinked demand curve: i. In some oligopolies, there may be an element of price leadership. In this model, every organization faces two demand curves. A formal agreement formed among competing organizations is known as cartel.