Oligopolies, The Kinked Demand Curve

A2 Economics

Aim To fully understand kinked demand curve theory.

Objectives Define perfect oligopoly and an imperfect oligopoly. Explain the features of a competitive oligopoly. Identify the barriers to entry in an oligopolistic market. Describe and Explain the Kinked Demand Curve

Theory. Evaluate the Kinked Demand Curve Theory. Analyse the oligopolistic car market.

Aims and Objectives

Define a perfect oligopoly.

Define an imperfect oligopoly.

Explain what a competitive oligopoly is.

Identify the barriers to entry in an

oligopolistic market.

Starter: Oligopo..recap

FEEDBACK

In groups, produce on large paper your plan to teach the theory of the Kinked Demand Curve to your peers.

It should include: Diagram number 1 An explanation of the diagram and firm behaviour in the

market, explaining why prices are stable in an oligopolistic market.

Or Diagram number 2 An explanation of the diagram and reasoning as to how an

increase or decrease in marginal costs in an oligopolistic market may not affect prices.

Kinked Demand Curve Theory Team Teach!

TEACH!

1) No explanation of how and why a firm chooses in the first place to be at point x.

Criticism 1 of Kinked Demand Curve Theory

2) Theory only explains price competition, and not non-price competition.

However we know oligopolists compete in a non-price manor, as this is a barrier to entry to an oligopolistic market.

Does the model reflect reality?

Criticism 2 of Kinked Demand Curve Theory

Model assumes that oligopolists will react in a

certain manner and this is often not the case in

reality.

More realistic that firms ‘test the market’.

By raising or lowering their selling price to see if

rivals react in the expected manner.

If rivals do not react in a similar way….

The oligopolist must rethink its estimate of the

demand curve.

Criticism 3 of Kinked Demand Curve Theory

Under some circumstances firms may feel that they wish to compete on price, reckoning that it is the strongest firm in the market.

Examples?

Tesco 31% share of oligopolistic market.

Generally its actions are imitated, including price changes.

Price of milk across all supermarkets.

Criticism 4 of Kinked Demand Curve Theory

Three Oligopolistic Markets.

Car Industry Supermarkets

Banking

Reigning In Big Businesses

What was the effect of the barriers to entry in the Car industry for British consumers?

How was the main barrier to entry achieved? What were the effects of the EC reducing the effects

of the barrier to entry? What has happened to prices across the EU

markets? What has been the overall effect on the UK

industry? What effects could the 2008/9 recession have on

the future of the UK car industry?

Car Industry Points for Discussion

Read through the Supermarket case study and come to the lesson with points to discuss on Friday 26th of November.

Homework