Question

With reference to Sweezy’s model of the kinked demand curve, explain the reasons why we might expect price to be unresponsive to small variations in cost in the case of oligopoly. What are the main limitations of the kinked demand curve model?  

b. Quote real world examples of oligopolistic firms that have benefited from a first-mover advantage.

Answer 1

In oligopolistic market firm can not have a fixed demand curve as the competitors in the market keep changing prices and quantity for several times.It is seen that in oligopolistic market price tends to be inflexible for a long period of time even when the firm faces declining cost.Thus here comes the idea of kinked demand curve by the economist Sweezy, there is two reasons behind the kinked demand hypothesis at a prevailing price which are

• Segment above the kin at prevailing price is highly elastic and
• segment below the kink is highly inelastic.

There are some assumptions in oligopoly market which leads to have diff elasticity of diff demand curve.which are

• If a firm lowers price below the prevailing market price, then competitors will follow that firm.(Inelastic segment)
• if a firm increases the price above the prevailing price then the competitors will not follow the firm.( Elastic segment)

The limitation that the kinked demand curve has is that though the kinked demand curve defines that why the oligopolistic firm should keep their price rigid but dose not refers and explains anything about why or how prices are established at the first place.

Real world example of first mover advantage oligopoly is Airbus and Boeing .They have advantages for being the leading firm in the aircraft sector worldwide.