7.1 Characteristic of Monopolistic Competition 7.2 Short-run Decision: Profit Maximization 7.3 Short-run Decision: Minimizing Loss 7.4 Long-run Equilibrium 7.5 E conomic E fficiency and R esource A llocation Chapter Outline
Price rigidity explain the behavior of an oligopoly firm which has no incentive to either increase or decrease the price of its products.
The theory of a kinked demand curve is based on two assumptions :
If an oligopoly reduces the price of his product, his rivals will follow and reduces their price too, so as to avoid losing customers.
If an oligopolist increase the price of his products, his rival will not increase their price but instead maintain the same prices, thereby gaining customers from which firms which increase their price.
Dominant Strategy is one that is optimal no matter what an opposition does.
A & B sell competing products
They are deciding whether to undertake advertising campaigns.
Their decision is interdependence on other firm decision.
Payoff Matrix for Advertising Game: (A,B) Firm A Advertise Not Advertise Advertise Not Advertise Firm B Dominant Strategies A A B A A A What strategy should each firm choose? Game Theory A B A B A B 10 , 5 15 , 0 10 , 2 6 , 8
The concept of the prisoner’s dilemma can be used to analyze price and non-price competition in oligopolistic markets, as well as the incentive to cheat in a cartel (i.e., the tendency to secretly cut prices or to sell more than the allocated quota.