An oligopolistic industry has two sets of demand curves. If firm 1 is the only one that changes price while the other are constant, its demand curve is: Q = 82 – 8P (1) and MR = 10.25 - 0.25Q. On the other hand, competitors are expected to follow the price changes of firm 1. This new demand curve is: Q = 44 – 3P (2) with MR = 14.66 – 0.66Q
a. Calculate the range of marginal revenues on the vertical portion of the MR curves at the level of output where a kink takes place. Identify the level of output where there is a kink in the demand curves. Call this portion of demand curves as “reverse L shaped portion” of the kink demand curves.
b. Identify the other portion of the reverse L shaped kink demand curves (call it “L shaped portion” of the kink demand curves). Discuss the difference in the implications behind this “L shaped portion” and “reverse L shape portion” of the kinked demand curves. Explain which one is considered to be “optimistic” and which one, “pessimistic,” and why?
c. Find the price at the kink each oligopolist would charge at the kink
d. Suppose that there are two firms within this range under this oligopoly: one with higher MC (VC) but lower fixed cost and other with lower MC but higher fixed cost. But both MC’s are within the range of marginal revenue on the vertical portion of the MR. Would they charge the same or different prices at the kink given this new information? Why or why not? 
e. What would happen to the price and the quantity implied above in the kinked demand curves if production cost for the whole industry increases due to a tighter environmental restriction? 
f. How would your answer in (e) change if the cost increase, which still falls within the vertical range of MR curves, was only for one oligopolistic firm in the industry?
g. What does this kink demand curve example try to teach us in view of the various points discussed so far in this question?

  • CreatedAugust 26, 2013
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