The document summarizes Sweezy's model of oligopoly pricing behavior. It shows two demand curves representing what happens when a firm changes its price and competitors do or do not follow. This creates a "kinked" marginal revenue curve that is discontinuous at the point of equilibrium, providing no incentive for the firm to change its price or output. The model suggests firms in an oligopoly will gravitate towards "sticky prices" at the point of equilibrium.
Beginners Guide to TikTok for Search - Rachel Pearson - We are Tilt __ Bright...
Kinked Demand Curve.ppt
1.
2. Sweezy’s 1942 contribution.
Samuelson immortalized it.
The “young” oligopoly case.
The industry starts out with price
wars and gravitates toward “sticky prices.”
3. There are two sets of demand
curves: one where competitor’s
respond to our initiative and
one where they don’t. So we draw two
sets of revenue curves.
4. D2=AR
MR2
With the blue
revenue curves, our
competitors do
respond.
With the pink revenue
curves, our competitors
do not respond
5. D1
Q MR1
We start with a price
at the intersection of the
blue and pink demand
curves.
To the left of that point (also
Q), when we raise our price,
we act alone – nobody
follows our increase.
When we reduce our price,
competitors will follow
and sales fall off rapidly.
Not an appealing outcome!
6. D1
Q MR1
We can simply erase
the dotted segments of
the respective revenue curves,
since they are not relevant
to the outcome.
7. D1
Q MR1
To the left of Q, only D2
and MR2 are relevant,
so erase D1+MR1 to the
left of Q.
To right of Q, only D1
and MR1 are relevant,
so erase D2 and MR2
to the right of Q.
8. D1
Q MR1
P
Sweezy observed:
At the intersection of D1+D2 (the “kink”), we are in
equilibrium.
If we raise
the price:
Nobody
follows us!
If we reduce
the price:
everybody
does!
9. Note the discontinuous segment of the firm’s MR curve!
The MR curve becomes vertical at Q, so that there is no
incentive to change the output, Q, or the price as long as
the MC curve intersects the MR at that output.
D1
Q MR1
P
