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Questions and Answers
What happens to the quantity demanded of your product when you increase your price and your rival does not match this increase?
What happens to the quantity demanded of your product when you increase your price and your rival does not match this increase?
In the kinked-demand model, how does the quantity demanded change when you lower your price while your rival does not lower theirs?
In the kinked-demand model, how does the quantity demanded change when you lower your price while your rival does not lower theirs?
According to the kinked-demand model, what is likely to happen to demand if both firms increase their prices simultaneously?
According to the kinked-demand model, what is likely to happen to demand if both firms increase their prices simultaneously?
What key insight is derived from the kinked-demand model regarding price reductions?
What key insight is derived from the kinked-demand model regarding price reductions?
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When considering strategic interaction in an oligopoly, what is a major concern for firms?
When considering strategic interaction in an oligopoly, what is a major concern for firms?
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Why might a firm experience a smaller increase in demand when lowering prices if its rival also lowers prices?
Why might a firm experience a smaller increase in demand when lowering prices if its rival also lowers prices?
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What characteristic of oligopolistic firms affects their pricing strategies?
What characteristic of oligopolistic firms affects their pricing strategies?
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How does the kinked-demand curve reflect a firm's risks in an oligopoly?
How does the kinked-demand curve reflect a firm's risks in an oligopoly?
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In a scenario where a firm raises its price but its rival lowers theirs, what is the anticipated outcome for the original firm?
In a scenario where a firm raises its price but its rival lowers theirs, what is the anticipated outcome for the original firm?
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What determines the extent of demand change when a firm alters its prices in an oligopoly?
What determines the extent of demand change when a firm alters its prices in an oligopoly?
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What is the main assumption of firms in a Sweezy oligopoly regarding price reductions?
What is the main assumption of firms in a Sweezy oligopoly regarding price reductions?
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Which characteristic is NOT a part of the Sweezy model of demand?
Which characteristic is NOT a part of the Sweezy model of demand?
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What occurs when a firm in a Sweezy oligopoly raises its prices?
What occurs when a firm in a Sweezy oligopoly raises its prices?
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What is the key feature of price rigidity in the Sweezy model?
What is the key feature of price rigidity in the Sweezy model?
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In a scenario where a firm decreases its prices, what do firms in a Sweezy oligopoly expect from their rivals?
In a scenario where a firm decreases its prices, what do firms in a Sweezy oligopoly expect from their rivals?
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What does the Sweezy model suggest about the flexibility of prices in oligopolistic markets?
What does the Sweezy model suggest about the flexibility of prices in oligopolistic markets?
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What is characteristic of marginal revenue in the context of the Sweezy model?
What is characteristic of marginal revenue in the context of the Sweezy model?
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What are barriers to entry in the Sweezy oligopoly context?
What are barriers to entry in the Sweezy oligopoly context?
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Which of the following statements accurately describes the reactions of firms in a Sweezy oligopoly to price changes?
Which of the following statements accurately describes the reactions of firms in a Sweezy oligopoly to price changes?
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How does strategic interdependence affect firms in an oligopoly?
How does strategic interdependence affect firms in an oligopoly?
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Study Notes
Role of Strategic Interaction
- Firms are interdependent and their actions affect each other's profits.
- This means a firm's profits are not just based on its decisions but also the responses of its rivals.
- A firm selling differentiated products needs to consider how a price change will impact demand, taking into account potential rival responses (matching or not matching).
- For example, if a firm raises its price and rivals don't, consumers may opt for the lower-priced competitor.
Sweezy (Kinked-Demand) Model Environment
- This model is based on specific market characteristics: A few firms dominating the market, these firms selling differentiated products with barriers to entry for new competitors.
- The model’s key assumption is that rivals will match price reductions but not price increases.
- This creates a 'kink' in the demand curve and creates a non-optimal pricing strategy, where firms are reluctant to change prices.
- It's like a price war, where everyone loses.
Sweezy Demand and Marginal Revenue
- The Sweezy demand curve is kinked at the prevailing market price (P0).
- The demand is more elastic below the prevailing price because rivals match price reductions, leading to significant demand changes.
- Above the prevailing price, demand is less elastic because rivals are less likely to follow price increases, resulting in smaller demand changes.
- This kinked demand curve translates into a discontinuous marginal revenue curve, where marginal revenue drops drastically at the kink, making firms hesitant to adjust prices.
- This creates a price rigidity, where firms are likely to keep prices constant due to the potential for loss.
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