Question

What does a graph of a company in an oligopoly market look like if there has been a change in cost?

Answer 1

In the case of competing oligopoly, an oligopolistic firm does not change prices in case of changes in cost as this can lead to price wars. The following diagram illustrates such a scenario.

As there is a kinked demand curve, this shows the sensitivity of demand to changes in the prices which is different at the uppar part and lower part of the kink. Thus price wars is higher in case of higher prices and elasticity is greater in the upper part.

Having explained the AR or Demand curve, the subsequent MR curve is such that whether MR = MC upper or MR = MC lower or any other cost curve in between, the Price remains the same due to fear of losing profits with a lowering of prices.

Hence, change is cost doesn't have any effect on oligopolistic firm's quantity or prices due to the fear of price wars.

There is coordination in terms of prices. However, oligopolies compete through the other features of their products, such as brand loyalty, marketing techniques.