Answer to Question #125812 in Economics of Enterprise for Ayanda

Question

2.1 Explain the kinked demand curve theory of an oligopoly. Include in your answer a discussion of a contemporary oligopoly.

2.2 discuss and motivate whether the following market structures can engage in price discrimination.
2.2.1 perfect competition
2.2.2 Monopoly

Answer 1

Explain the kinked demand curve theory of an oligopoly. Include in your answer a discussion of a contemporary oligopoly.

A kinked demand curve is a demand curve that is depicted in the oligopoly market. A kinked demand curve has different elasticity for higher and lower prices. If a firm increases its price, it will cause a decrease in market share as the customers will move to buy the products of their rivals. This means that a increase in the level of prices will cause a decrease in demand. On the other hand, if a firm decreases its price, it will experience an increase in the level of revenue due to increased in demand market share. When other firms notices a decrees in their market share, they will reduce their prices too to attract more customers. This increase and decrease in prices leads to price wars. Finally, there will be only a small percentage increase in the level of revenue experienced by a firm. Examples of oligopoly firms are the firms that that deal with automobile manufacturing.

discuss and motivate whether the following market structures can engage in price discrimination.

2.2.1 perfect competition

2.2.2 Monopoly

The only market where price discrimination can be practiced is in monopoly. The reason behind this is because the monopoly is a single seller and if they are dealing with an essential product, individuals will buy despite the price level. A monopoly practices the following price discrimination practices:

First degree price discrimination.

Second degree price discrimination.

Third degree price discrimination.