What is the cost to a firm in an oligopoly that fails to take rivals' actions into account? Suppose the firm operates along demand curve D1, shown below, as if no firms will follow its lead in price cuts or price rises. In fact, however, other firms do follow the price cuts, and the true demand curve below price P1 lies below D1. If the firm sets a price lower than P1, what will happen?
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In an oligopoly industry, there is a mutually interdependent pricing dynamics which is explained by the Kinked Demand Curve Model. The basic assumption behind this model is that competitors will follow a price decrease but will not make a change in reaction to price increase. If the firm is operating along the curve D1 and has fixed ...
This post explains how firms should take into account the rivals' actions by showing it on graph i.e. kinked demand curve