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Question
What is meant by prices being rigid? How can oligopoly behaviour lead to such an outcome?
Solution
Price rigidity implies that the price is unresponsive to the changes in demand. This is because of the fact that even if any firm raises the price of its product with the motive of earning higher profits, the other firm will not do so, and the first firm will lose its customers. On the other hand, if one firm lowers its price in order to earn higher profits by maximising its sales, then in response, the other firm may also reduce the price. Consequently, the increase in total market sales is shared by both the firms. The firm that initiated selling at a lower price may get a lower share of the increase than expected.
Therefore, the firms do not change their prices due to the fear of rival’s reaction. Hence, there is no incentive for any firm to change its price. That is why the prices are regarded as rigid prices or sticky prices.
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RELATED QUESTIONS
What would be the shape of the demand curve so that the total revenue curve is
(a) a positively sloped straight line passing through the origin?
(b) a horizontal line?
From the schedule provided below calculate the total revenue, demand curve and the price elasticity of demand:
|
Quantity |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
|
Marginal Revenue |
10 |
6 |
2 |
2 |
2 |
0 |
0 |
0 |
−5 |
What is the value of the MR when the demand curve is elastic?
Comment on the shape of MR curve in case when TR curve is a positively sloped straight line.
List the three different ways in which oligopoly firms may behave.
If duopoly behaviour is one that is described by Cournot, the market demand curve is given by the equation q = 200 − 4p and both the firms have zero costs, find the quantity supplied by each firm in equilibrium and the equilibrium market price.
Comment on the shape of MR curve in case when TR curve is a horizontal straight line.
