THOUGHT

QUESTION
SLIDE /
 THOUGHT
QUESTION

I have a simple addition problem.

The sum is the name of
my topic today!

SLIDE /
 KIN WIN
G K

SLIDE /
 KINK-
ED
= demand
curve

SLIDE /
 KINKED
DEMAND
CURVE
a presentation
by:
Roshane Domus
12-ABM
SLIDE /
 The Kinked Demand Curve is developed
interdependently.

1. Paul M Sweezy
America
2. Hall and Hitch
UK

DEVELOPERS
1939
daddeh Paul

SLIDE /6
 One model of the behavior of oligopolistic firms

DEFINITION in
non-collusive situations
A business in an oligopoly faces
WHAT IS KINKED a downward sloping demand
curve but the PED may depend
DEMAND CURVE? on the likely reaction of rivals to
The demand curve changes in one firm’s price and
facing an oligopolist output.
has a kink
(imperfection)
at the level of the
prevailing price.

SLIDE /3
ASSUMPTIONS
Not all you assumpt are real.
‘Wag ka umasa, masasaktan ka lang.
{Don’t hope; you’ll just get hurt.]

Assumption Assumption Assumption Assumption

Number 1 Number 2 Number 3 Number 4

All firms are All firms are Firms in an oligopoly Rival firms are
quite developed selling goods on a are looking to protect unlikely to match
w/ or w/o product fairly satisfactory and maintain their another's price
differentiation. price market share. increase but may
in the market. match a price fall.

SLIDE /
 ASSUMPTION
NUMBER FOUR
1. Firm increases price, but other firms don’t
follow
 large substitution effect making demand
relatively price elastic
 The business looses market share and
experiences a fall in its TR.
2. Firm decreases price, and other firms
follow
 relative price change is smaller and demand
would be inelastic Map
 Leads to a fall in revenue with little or no
effect on market share.

SLIDE /9
 THEORY
EXPLAINED
Ready or ready, here we goo!

SLIDE /
 ELASTIC AND
INELASTIC
DEMAND
Firms’ Likely Reactions

 Theory starts with

assumption that firms are
settled on price P1 and
quantity Q1.
 At D1, the demand curve
is elastic above P1 and
demand inelastic below
P1.
SLIDE /11
LIKELY REACTION
FOR ELASTIC
DEMAND
 Raising price above P1:
Other firms hold their
prices.
 Relatively Elastic Demand
 Lost sales and falling total
revenue

SLIDE /12
LIKELY REACTION
FOR INELASTIC
DEMAND
 Decreasing price below
P1: Other firms follow.
 Relatively Inelastic
Demand
 Little increase in extra
sales and total revenues

SLIDE /13
 KINKED
DEMAND
CURVE
 If demand is relatively
elastic after a price rise
and relatively inelastic
after a price fall—> a
kink on the oligopolists
demand curve (AR)

SLIDE /14
The price is to remain stable at P
because the price decrease will result in
AS A
limited gains and might even provoke a RESULT …
price war which it could lose and raising
price will result in a substantial loss of
market share.
TAKE NOTE!

 MR curve always 2x as steep as

AR.
 If AR is kinked, there will be two
MRs.
 A vertical intersection at quantity
Q1— where curves don’t actually
intersect.

ROLE IN
MR’S KDC’S LIFE
SLIDE /
 PRICE RIGIDITY

The model of the kinked

demand curve suggests
prices will be stable even
in the face of rising costs
(assuming that firms in the
market are profit seeking).

SLIDE /
  At any point between
L and M, the price
will remain the same
even if the MC shifts
up or down due to
the discontinuity.
L

SLIDE /18
  At any point between L
and M, the price will
remain the same even
if the MC shifts up or
down due to the
discontinuity.
 Profit maximizing output
L
and associated price will
change only at a point
M above L.

SLIDE /19
 OVERVIEW

01 Oligopoly firms have price-setting power but may be reluctant to use it.

02 Rivals unlikely to match a price rise and rivals likely to match a price fall.

03 If a firm is settled on one price, less chances of changing (price stability).

04 This increases the importance attached to non-price competition.

SLIDE /20
HOW TO
COMPETE?
SALES NON-PRICE QUALITY OF
SERVICE [AFTER-
PROMOTION
COMPETITION SALES CARE]

 Alternatives to
price reductions as
methods used by
BRANDING firms to increase LOYALTY
SCHEMES
market-share

SLIDE /
 BUT
ECONOMISTS
SAID…

Map

SLIDE /22
 01 02 03 04
CRITICISMS ISSUE ISSUE ISSUE ISSUE
of the KDC Empirical evidence to Doesn’t say how Assumes firms in Doesn’t take into
support this model is prices and output oligopolies always account the fact that
very weak. Prices do were reached in operate in the same there’s much non-
change in oligopolistic
the first place. predictable ways price competition
markets much more
over time
often than this model
suggests.

SLIDE /23
 THANK YOU!!
♡♡♡

whoever asks will get a demerit. 😇

@carmicitia_

Shane Domus

SLIDE / nope :p