OLIGOPOLY

CHARACTERISTICS:
1.Few sellers in the industry
2. Firm produces standardized or
differentiated product.
Standardized Product-Steel,cement
Differentiated product- automobile,
computer, soft drink
3. There is a mutual interdependence among
the firms.
Firm will consider the reactions of rivals in
its pricing strategy
4. Difficult to enter the industry
-many barriers ( large financial capital,
technology, or government regulations)
1

PRICE AND OUTPUT DETERMINATION

KINKED DEMAND CURVE MODEL

-consider the reactions of rivals into its pricing
strategy

MC

P*
D
Qty
Q*
MR
Kinked Demand curve is based on two
assumptions:
1. When a firm increases the price, rivals
will not follow (inelastic demand)
2.When a firm decreases the price, rivals
will follow its pricing strategy (elastic
demand)
2

At kink

P1 =P2

OR Q1=Q2
At this point, if MC cuts the MR within
MR gap, Price and output at kink are
optimal (profit-maximizing)
If not, Price and output at kink are not
optimal (profit-maximizing)
Find the profit maximizing price and
quantity using MR=MC
(the relevant MR)
A changes in MC at MR gap will not affect
the price and output

Ex:
P1= 65-Q1
P2=90-3Q2
At kink, P1 =P2
65-Q=90-3Q
2Q=25
Q=12.5
P= 52.5
Total profit = 81.25
MR1=65-2Q1= 65-2(12.5)= 40
MR2=90- 6Q2= 90-6(12.5) =15
If MC= 30, it is between MR gap, so Price
and quantity at kink are optimal