Answer to Question #225905 in Microeconomics for Devil

Question

(a) Define oligopoly & its features. Discuss the nature of kinked Demand Curve. 

 (b) Show game theory under oligopolistic market.

Answer 1

a)

An oligopoly is a market dominated by a few firms. This market consists of few firms selling homogeneous or differentiated products.

Features of Oligopoly

I) Few large firms engaging in severe competition

Ii) Barriers to entry of new firms into the industry. Barriers such as licenses, patents, control of crucial raw materials.

III) Non-price competition in fear of price wars hence dependent on non price methods such as advertising, services, warrants

IV) Firms sell homogeneous or differentiates products.

V) Prediction of the demand curve is not possible.

VI) Interdependence: The firms are affected by price and decisions made by rival firms.

Oligopoly market have a kinked demand curve at the prevailing level of price. Therefore, the curve is less elastic below the kink and more elastic above it. This shows that the price decrease response is more than the price increase response.

“Game theory is studies behavior of People in strategic situations. The Oligopoly market firms therefore are playing a game against each other. It is important to understand how players play games to predict how they might act.