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level: Interdependence in Oligopolistic Markets

Questions and Answers List

level questions: Interdependence in Oligopolistic Markets

QuestionAnswer
What does the Kinked Demand Curve assume?-Price Stability is Visualised by the Kinked Demand Curve -When a Firm raises its Prices, the other Firms will NOT raise their own -When a Firm drops its Prices, the other Firms WILL raise their Prices. (Threat of making a Loss too)
Explain how the Kinked Demand Curve works-When a Firm raises its Prices, it will see a Large Drop in its Demand. Consumers are going to Switch to their Rivals. Thus, the Demand Curve is Price Elastic -When a Firm lowers the Price, the Market Share won’t really Increase. All other Firms will Drop prices else it will lose Revenue. When Prices fall, demand is Price Inelastic.
What is the Outcome from the Kinked Demand Curve -Is it seen in all Oligopolistic Markets?-Result of the Kinked Demand Curve shows that Firms have no Interest to Change their Prices. Both will end up being a Loss for them -This isn’t seen in All Markets though. The Assumptions may be not always Best Suited for the Oligopoly, and this, its hard to Predict the Behaviour -Furthermore, Price Drops and Increases can be due to Non-Price Factors (Quality)
What is Game Theory and how does it tie in with Economics?-Game Theory comes from Maths. It is when 2 or more ‘Playerss’ (Economic Agents, Firms, Governments..) are working out what to do to Enhance and Push more their Interests -The Outcome of each ‘Player’ stems from their Own Choices, and the Choices from Everyone Else. They are all Interdependent. -Ties in with Economics, as Rational Theory suggests that Economic Agents act in their own Self Interest.
How can the Prisoners’ Dilemma show First-Mover Advantage (And the Problem with Informal Collusive Oligopolies)-Suppose Apple and Samsung are the only 2 Firms in the Smartphone Industry. -Each of them must decide how much Output to Make. Low or High -Apple and Samsung Knows that the Other Firm is trying to Guess what Their Output will be. -Apple and Samsung know that their Own Choices affect the Other. -The Result is a Payoff Matrix, where Both can Win, Lose, or one can Win. (Both Win = Both pick Low Output) (Both Lose = Both pick High Output) (Apple Win = Samsung makes Low, Apple makes High, and vice er versa)
Why may First-Mover actually Disadvantage the Cheater?-The Payoff Matrix may work Against the Firm that is attempting to Move First. Say the 'First Mover' can get a Huge Profit -If they Overestimate Demand, they risk making Huge Losses and risk Collapsing -Rivals can use the Technology the First Mover had Researched and Developed for a Lot Less.