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Definition
Characteristics
Types of Oligopoly
Kinked Demand Curve
The firms equilibrium
Come from the Greek word “Oligos”
means “ a little”
a market structure with a few no of
large firms producing & supplying all
output in the market
eg: Petroleum industry & steel
industry, Automobile manufacturers,
Personal Care Products, Cigarette
Manufacturers
AR = Dd
AR = Dd MR
MR
Qty Qty
The Kinked Demand
A combined strategy
Curve
a n
is
M R 1
tic ve
s
D 1 ela cur
Price
in d
a n
em
d
D1
MR1 Qty
The Kinked Demand
A combined strategy
Curve
Price
D2 MR2 is an
elastic
demand
curve Pe
D2
Pe & Qe are
equilibrium
price & eqb MR2
Qty D1
respectively
Qe
MR1 Qty
The Kinked Demand
A combined strategy
Curve
Price Rivals tend to
If the firm follow a price cut
raises the or ignore a
price from Pe price increase
to P1, other
P1
firm will not
follow, and Pe
the firm will
lose a mkt D2
share where
qty Dd
decrease
This is MR2
from
shown Qeonto Q1
D1
elastic Dd Qe MR
Q1 Qty
curve D2 1
The Kinked Demand
A combined strategy
If the firm lowers Curve
Price Rivals tend to
its price from Pe to
follow a price cut
P2, other firm will
forllow to avoid
losing a share mkt
to the firm which
lowers its price.
Lowering the price Pe
will increase the
Qty Dd from Qe to
Q
This
2. is the small
D2
increase because P2
other firm will also
lower the price &
they manage to
MR2
attain the same D1
share in the mkt. Qe
the situation is MR1 Q2 Qty
shown on elastic Dd
The Kinked Demand
A combined strategy
Curve
Price
Effectively creating
So the actual a kinked demand curve
Dd curve of
the firm
combination
of D1 & D2.
so the
demand D2
curve is
kinked
(as shown at
yellowline) MR2
D1
MR1 Qty
The Kinked Demand
A combined strategy
Curve
Price
Effectively creating
So the actual a kinked demand curve
Dd curve of
the firm
combination
of D1 & D2.
so the
demand
curve is
kinked
(as shown at
yellowline) D
MR Qty
to maximize profit, the oligopolist firm
will not involve in price competition.
(price rigid)
D
Qe MR Qty
Price
If the frim becomes Profit maximization
more efficient, MC MR = MC occurs
will decrease MC1 to
at the kink
MC
The2 output produced MC1
is still at Qe at the
same price, Pe . MC2 Pe
The profit has A
increased to area MC2
A+B e1
So, without changing B
the price, the firm
can maximized profit
by reducing cost
efficiency in e2 D
production Qe Qty
MR
Profit is maximized when MR =
MC
Price As long as the curve intersect
at the vertical gap of MR curve,
the profit maximizing quantity
& price will be at kinked.
Pe = 50
MC
25 AC
17
8
D
Qe = 40 MR Qty
If the amount of MC is within
RM 8 to RM 25, the equilibrium
Price output will be 40 units and
price will be RM 50
Pe = 50
MC
25 AC
17
8
D
Qe = 40 MR Qty
Price
Qe = 40
units
Pe = RM 50
TR = P x Q
= 50 x
40 Pe =50
MC
= 2000
TC = AC x 25 AC
Q
= 17 x
40 17
∏ = = 680
TR - TC 8
= 2000 - D
680 Qe = 40 Qty
MR
= 1320
In order to max , firm will
try to minimize cost since
Price there is no competition in
Qe = 40 terms of price
units
Pe = RM 50
TR = P x Q
= 50 x
40 Pe =50
MC
= 2000
TC = AC x 25 AC
Q
= 17 x
40 17
∏ = = 680
TR - TC 8
= 2000 - 680 D
= 1320 Qe = 40 Qty
MR
(supernormal
Wat will happened when MC is
AT kinked point???
Price
MC
AC
Pe = 50
25
17
8
D
Qe = 40 MR Qty
Wat will happened when MC is
ABOVE kinked point???
Price MC
AC
75
Pe = 50
25
17
8
D
Qe = 40 MR Qty
Market Structure
Perfect Monopolistic
Characteristics
Competition Competition Oligopoly