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Oligopoly in the auto industry

5) The American automobile industry has been an archetypical oligopoly. Show why this statement is true.

6) Explain the cutthroat competitors reasons for not raising or lowering his price, thereby accounting for the kink in his demand curve.
The cut-throat competitors' reason for not raising or lowering prices are that if a competitor increases his prices about the existing level, the other competitors will not follow and the firm that has increased the price will lose its market share to other competitors. On the other hand if the firm lowers its prices the competitors will also lower their prices to protect their market share and so the firm that has taken the initiative to reduce the price will only gain slightly by way of quantity sold. What happens in the kinked demand curve model is that the demand curve above the point of equilibrium is very elastic but the demand curve below the point of equilibrium is inelastic. The overall effect of the kinked demand curve is that prices remain rigid.
7) What are the basic provisions of a collective bargaining agreement? Explain the differences between meditation and arbitration.

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5) The American automobile industry has been an archetypical oligopoly. Show why this statement is true.

The above statement is true because the automobile industry in the US enjoyed economic profits for a long period of time, there were few sellers, and there were innumerable buyers. In the automobile market the buyers possessed limited information about the product, the products were differentiated, and the sellers were interdependent. For this reason automobile makers kept a close watch on the prices of its competitors.

A good example of a price war between auto manufacturers occurred in 2005, when GM announced that all buyers would receive the discount normally reserved for employees. This caused its rivals, Chrysler and Ford, to announce similar programs. For more on this, see http://www.cbsnews.com/stories/2005/07/07/earlyshow/contributors/raymartin/main707345.shtml. Clearly, these companies are interdependent and watch each other closely, which is the key feature of oligopoly.

6) Explain the cutthroat competitors reasons for not raising or lowering his price, thereby accounting for the kink in his demand curve.

When a seller in a cutthroat market increases his prices, his competitors will not follow suit and he will lose market share. However, if the seller lowers his prices, his competitors will follow suit to protect their market shares. This means that the demand curve becomes less elastic, as the quantity consumed is less responsive to the firm's ...

Solution Summary

Cutthroat competition, oligopoly, collective bargaining, and poverty

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