Question

As you describe Paul Sweezy’s Kinked-Demand theory of oligopoly, do the following:
Explain why Sweezy’s model is an illustration of how “strategy and counter-strategy” create interdependence among the large firms who dominate an oligopoly.
Using Sweezy’s model, explain the reasons for changes in an oligopolist’s price elasticity of demand as the firm attempts to raise or lower its product price relative to its oligopolist competitors. Why is price competition unsuccessful in this model?

Answer 1

Paul Sweezy’s Kinked-Demand theory of Oligopoly:

The crimped demand curve of oligopoly was created by Paul M. Sweezy in 1939. Rather than laying accentuation on value yield assurance, the model clarifies the conduct of oligopolistic organisations. The model promoters that the conduct of oligopolistic associations stay stable when the cost and yield are resolved.

This suggests an oligopolistic advertise is portrayed by a specific level of value inflexibility or dependability, particularly when there is an adjustment in costs in descending bearing. For instance, if an association under oligopoly lessens cost of items, the contender associations would likewise tail it and kill the normal addition from the value decrease.

Then again, if the association builds the value, the contender associations would likewise chop down their costs. In such a case, the association that has raised its costs would lose some piece of its piece of the pie. The wrinkled demand curve model looks to clarify the explanation of value unbending nature under oligopolistic advertise circumstances. In this way, to comprehend the wrinkled demand curve model, it is imperative to take note of the responses of opponent associations on the value changes made by individual oligopolistic associations.

There can be two potential responses of adversary associations when there are changes in the cost of a specific oligopolistic association. The opponent associations would either pursue value cuts, yet not value climbs or they may not pursue changes in costs by any means.

Following are the assumption of a kinked demand curve:

I. Expect that in the event that one oligopolistic organization lessens the costs, at that point different organizations would likewise cut their costs

ii. Expect that in the event that one oligopolistic organization builds the costs, at that point different organizations would not pursue increment in costs

iii. Expect that there is constantly an overarching cost

The slant of a kinked demand curve varies in various conditions, for example, cost increment and value decline. In this model, each organization faces two demand curves. In the event of significant expenses, an oligopolistic organization faces profoundly versatile demand curve, which is 'dd' in Figure.

Then again, in the event of low costs, the oligopolistic organization faces inelastic demand curve, which is DD' (Figure). Assume the overarching cost of an item is PQ, as appeared in Figure. On the off chance that one of the oligopolistic organizations makes changes in its costs, at that point there can be three responses of adversary organizations.

Right off the bat, when the oligopolistic organization would expand its costs, its demand curve would move to dd' from DD'. In such a case, purchasers would change to rivals, which would prompt fall in the offers of the oligopolistic organization. What's more, the dP segment of dd' would be progressively flexible, which lies over the predominant cost.

Then again, if value falls, the adversaries would likewise decrease their costs, in this manner, the offers of the oligopolistic organization would be less. In such a case, the demand curve looked by the oligopolistic organization is PD', which lies underneath the predominant cost.

Furthermore, rival organizations won't respond regarding changes in the cost of the oligopolistic organization. In such a case, the oligopolistic organization would confront DD' demand curve.

Thirdly, the adversary organizations may pursue value cut, yet not value climb. In the event that the oligopolistic organization builds the cost and adversaries don't tail it, at that point purchasers may change to rivals. In this way, the adversaries would oversee the market. Hence, the oligopolistic organization would be constrained from dP demand curve to DP demand curve, with the goal that it can anticipate losing its clients.

Ignores non-price competition among organizations. Non-price competition can be in terms of product differentiation, advertising, and other tools used by organizations to promote their sales.