Question

A. Under the Kinked Demand Curve Model that pertains to oligopolies, how will competing firms react to a "rogue" firm if it decides to raise the price of its product? Explain why.


B. What is the basic approach used in all Game Theory models?

C. When is the use of a game theory likely to help a firm enjoy more success, and when is it likely to lead to some losses?   

Answer 1

Under the kinked demand curve model of oligopoly, there are little chances of firms changing their prices because above the kink, the demand is elastic and below the kink, the demand is inelastic. If the rogue firm decides to raise the price of its product, the firm will lose its market share because it will become uncompetitive as other firms are charging lesser price for the same product that's why the demand is said to be elastic. For a slight increase in prices, there will be a large drop in prices for the the firm. In an oligopoly setup, price competition is less used. Firms compete through other ways than prices