Reference no: EM131198046
Oligopolistic models are based on behavioral assumptions. One behavioral assumption associated with differentiated product markets is that price increases will not be matched, but price decreases will be matched. This view of pricing leads to the kinked demand curve. To examine why, consider the following simple model: Market inverse demand is given by P(Q) = 10 – Q, and suppose the current price of the product is $6.
I have seen this question answered a few times but never in full.
a. Suppose Firm A controls 50% of the market. What is the demand curve faced by this firm?
Write inverse demand in slope-intercept form.
b. What is demand faced by firm A given P = $6. Call this quantity Qb.
c. Suppose that, if firm A increases price form this point, other firms don not match the price increase. But if A decreases price, other firms decreases price to maintain their market share. The demand is this instance has two segments: the segment above P =$6 and the segment below P = $6. What should happen to firm A’s market share for prices above $6? What happens to its market share for prices below $6.
d. The final question that must be answered is how quickly does market share decline as price increases. Suppose A’s demand is linear above P = $6, and A is unable to sell any output above P = $8. Describe algebraically the inverse demand curve faced by the firm in this instance.
e. Provide a graph of firm A’s demand curve that is consistent with your answer.
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