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A kinked demand curve

The graph shows a kinked demand curve can result based on how an ologopoly expands or reduces output and how other firms react to these changes.
Consider a member firm in an oligopoly cartel that is supposed to produce a quantity of 10,000 and sell at a price of $500. The other members of the cartel can encourage this firm to honor its commitments by acting so that the firm faces a kinked demand curve. If the oligopolist attempts to expand output and reduce price slightly, other firms also cut prices immediately—so if the firm expands output to 11,000, the price per unit falls dramatically, to $300. On the other side, if the oligopoly attempts to raise its price, other firms will not do so, so if the firm raises its price to $550, its sales decline sharply to 5,000. Thus, the members of a cartel can discipline each other to stick to the pre-agreed levels of quantity and price through a strategy of matching all price cuts but not matching any price increases.

Many real-world oligopolies, prodded by economic changes, legal and political pressures, and the egos of their top executives, go through episodes of cooperation and competition. If oligopolies could sustain cooperation with each other on output and pricing, they could earn profits as if they were a single monopoly. However, each firm in an oligopoly has an incentive to produce more and grab a bigger share of the overall market; when firms start behaving in this way, the market outcome in terms of prices and quantity can be similar to that of a highly competitive market.

Tradeoffs of imperfect competition

Monopolistic competition is probably the single most common market structure in the U.S. economy. It provides powerful incentives for innovation, as firms seek to earn profits in the short run, while entry assures that firms do not earn economic profits in the long run. However, monopolistically competitive firms do not produce at the lowest point on their average cost curves. In addition, the endless search to impress consumers through product differentiation may lead to excessive social expenses on advertising and marketing.

Oligopoly is probably the second most common market structure. When oligopolies result from patented innovations or from taking advantage of economies of scale to produce at low average cost, they may provide considerable benefit to consumers. Oligopolies are often buffeted by significant barriers to entry, which enable the oligopolists to earn sustained profits over long periods of time. Oligopolists also do not typically produce at the minimum of their average cost curves. When they lack vibrant competition, they may lack incentives to provide innovative products and high-quality service.

The task of public policy with regard to competition is to sort through these multiple realities, attempting to encourage behavior that is beneficial to the broader society and to discourage behavior that only adds to the profits of a few large companies, with no corresponding benefit to consumers. Monopoly and Antitrust Policy discusses the delicate judgments that go into this task.

The temptation to defy the law

Oligopolistic firms have been called “cats in a bag,” as this chapter mentioned. The French detergent makers chose to “cozy up” with each other. The result? An uneasy and tenuous relationship. When the Wall Street Journal reported on the matter, it wrote: “According to a statement a Henkel manager made to the [French anti-trust] commission, the detergent makers wanted ‘to limit the intensity of the competition between them and clean up the market.’ Nevertheless, by the early 1990s, a price war had broken out among them.” During the soap executives’ meetings, which sometimes lasted more than four hours, complex pricing structures were established. “One [soap]executive recalled ‘chaotic’ meetings as each side tried to work out how the other had bent the rules.” Like many cartels, the soap cartel disintegrated due to the very strong temptation for each member to maximize its own individual profits.

How did this soap opera end? After an investigation, French antitrust authorities fined Colgate-Palmolive, Henkel, and Proctor&Gamble a total of €361 million ($484 million). A similar fate befell the icemakers. Bagged ice is a commodity, a perfect substitute, generally sold in 7- or 22-pound bags. No one cares what label is on the bag. By agreeing to carve up the ice market, control broad geographic swaths of territory, and set prices, the icemakers moved from perfect competition to a monopoly model. After the agreements, each firm was the sole supplier of bagged ice to a region; there were profits in both the long run and the short run. According to the courts: “These companies illegally conspired to manipulate the marketplace.” Fines totaled about $600,000—a steep fine considering a bag of ice sells for under $3 in most parts of the United States.

Even though it is illegal in many parts of the world for firms to set prices and carve up a market, the temptation to earn higher profits makes it extremely tempting to defy the law.

Key concepts and summary

An oligopoly is a situation where a few firms sell most or all of the goods in a market. Oligopolists earn their highest profits if they can band together as a cartel and act like a monopolist by reducing output and raising price. Since each member of the oligopoly can benefit individually from expanding output, such collusion often breaks down—especially since explicit collusion is illegal.

The prisoner’s dilemma is an example of game theory. It shows how, in certain situations, all sides can benefit from cooperative behavior rather than self-interested behavior. However, the challenge for the parties is to find ways to encourage cooperative behavior.


Mary and Raj are the only two growers who provide organically grown corn to a local grocery store. They know that if they cooperated and produced less corn, they could raise the price of the corn. If they work independently, they will each earn $100. If they decide to work together and both lower their output, they can each earn $150. If one person lowers output and the other does not, the person who lowers output will earn $0 and the other person will capture the entire market and will earn $200. [link] represents the choices available to Mary and Raj. What is the best choice for Raj if he is sure that Mary will cooperate? If Mary thinks Raj will cheat, what should Mary do and why? What is the prisoner’s dilemma result? What is the preferred choice if they could ensure cooperation? A = Work independently; B = Cooperate and Lower Output. (Each results entry lists Raj’s earnings first, and Mary's earnings second.)

Raj A ($100, $100) ($200, $0)
B ($0, $200) ($150, $150)

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Jane and Bill are apprehended for a bank robbery. They are taken into separate rooms and questioned by the police about their involvement in the crime. The police tell them each that if they confess and turn the other person in, they will receive a lighter sentence. If they both confess, they will be each be sentenced to 30 years. If neither confesses, they will each receive a 20-year sentence. If only one confesses, the confessor will receive 15 years and the one who stayed silent will receive 35 years. [link] below represents the choices available to Jane and Bill. If Jane trusts Bill to stay silent, what should she do? If Jane thinks that Bill will confess, what should she do? Does Jane have a dominant strategy? Does Bill have a dominant strategy? A = Confess; B = Stay Silent. (Each results entry lists Jane’s sentence first (in years), and Bill's sentence second.)

Bill A (30, 30) (15, 35)
B (35, 15) (20, 20)

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The United States Department of Justice. “Antitrust Division.” Accessed October 17, 2013. http://www.justice.gov/atr/.

eMarketer.com. 2014. “Total US Ad Spending to See Largest Increase Since 2004: Mobile advertising leads growth; will surpass radio, magazines and newspapers this year. Accessed March 12, 2015. http://www.emarketer.com/Article/Total-US-Ad-Spending-See-Largest-Increase-Since-2004/1010982.

Federal Trade Commission. “About the Federal Trade Commission.” Accessed October 17, 2013. http://www.ftc.gov/ftc/about.shtm.

Questions & Answers

what is the difference between explicit cost and implicit cost
ustaz Reply
explicit cost:it is the cost which company made for purchasing or hiring resources from the factor owner. implicit cost : the cost of the owner of the company pay for the project.
explicit cost is that cost which is identified by the books of accounts of an organisation
implicit cost is that cost which is not shown in the books of accounts but due to this cost organisation gets some benefits
what is supply
The willing and able to sells their goods in various price of a commodity is called supply.
What is price elasticity of demand?
Kanishka Reply
price elasticity of demand is a measure used in economics to show elasticity of quantity demanded of good or service to get a change in it's price while nothing but price changes.
Price elasticity of demand is a measure of the change in the quantity demanded of a product in relation to its price change Price elasticity of demand = % change in quantity demand / % change in Price
Pls where can I found PRICE CONTROL on this app
Samuel Reply
top left corner
A situation in an economy with one producer but many consumers
Kabali Reply
What is the theory of population according to Malthus?
What is the Malthusian population theory?
The Malthusian theory of population state that, where there are means of substinence like food, human beings have the tendency to procreate (ie.give birth) without restraint (ie. control).
he stated that population unchecked grows at a geometric progression ie 1,2,4,8,16 while the means food subsistence grows at arithmetic progression ie 1,2,3,4,5---- he declared that population has the tendency to outstrip the means of subsistence
What is money?
money is any commodity that act as a medium of exchange
money is medium of exchange which is use in taking goods and giving some of it's worth or money value
what is a debit card and a credit card?
a debit card is a payment card used instead of cash while purchasing
a credit card is a payment card issued to users to enable cardholder to pay a merchant for goods and services
oky tanx
What is an inferior good.?
In economics, an inferior good is a good whose demand decreases when consumer income rises (or demand rises when consumer income decreases), 
what is monopoly
Richmond Reply
a market situation when there is only one seller of a product representing whole industry.
where one business is the dominant one in that market. It determines the market price as they are price makers. No entry, no competition.
it is a market situation where is a single seller and many buyer hear the seller is the price maker the is no free entering and exit in this market
A situation in the economy where there is one producer and many consumers
A market situation where there is one producer and many consumers.
Balance of payments for 2018
Mahlatse Reply
what is monopoly and what is monopolaist
Javid Reply
what is the affect of rise in value of dollar ?
monopoly"a single firm or company owns all or nearly all of the market for a given type of product or service "monopoly is a price maker ...barrier of entry ,non availability of close substitute.
monopolistic competition or market is a situation where there are few or many firm producing identical but differentiated product .eg difference in advertisement ,packing etc
monopolistic competition or market is a situation where there are few or many firm producing identical but differentiated product .eg difference in advertisement ,packing
monopoly is a market situation ...where there is a single seller and large number of buyers deals with commodities having no close substitutes......here the sellers are price makers... there is restrictions in the entry and exit of new firms in this market structure....
what is money?
money is a medium of exchange.....through which...commodities are bought and sold
money is a medium/means of exchange that generally accepted by law
What is tranfer earnings
what is savings income?
transfer earning is the minimum income that a factor is willing to accept in an occupation,it is also call the supply price of a factor
what is envelope curve
what is depreciation
depreciation means decrease in value of a assets due to normal wear or year ,means decrease in value of assets like a machine due to its daily use
Refers to wear and tear of capital machinery
what is meant by currency depreciation?
an envelope curve is also call an umbrella curve it is any curve that is enclosed by being tangen t to a series of other curves
fall in the value of currency vis-a-vis any other currency usually $ due to marker forces is called currency depreciation. it is different from devaluation where in value of currency is deliberately reduced to improve BoT
depreciation in its broad sense means loss in the value of fixed capital say a tractor due to i) normal wear and tear ii) normal rate of accidental damage iii) expected absolescence to meet this, Depereciation Reserve Fund is created it is calculated by firms on the basis of their experience.
what is green revolution ?discuss the achievement of green revolution in India
Sweety Reply
green revolution is the third revolution of agricultural refers to a set of research and development of technology transfer initiative occuring between 1930s and the late 1960s that increased agricultural is called green revolution
the green revolution happened because to improve the agricultural sector towards adopting mordern methods and improvement of agricultural equipments
green revolution means new innovation for high yielding varieties seeds towards economic development in agriculture sector. started in 1966, it's achievement increase per productive of all crops ie rice, wheat,maiz,etc...mainly 131 million food grain in 1978-79 produced in india
Punjab and haryana was the first 2 states which have been successfully adopted hyv's and due to this adoption these two states find more successfull in india and it contributed though our national income and also to GDP growth this helps in development of our nation.
what calculation for demand and supply
Amoo Reply
what is nationalisation
Awuni Reply
it is a process of converting private assets into public assets by undertaking the control of government or state authority
so true
what are some the things that may lead to nationalisation
Over exploring of customers by the private individuals Also to make the nationalised organisation social reliable and accessible by all
feeling of one's is called nationalisation. unity among them self .
anything which is widely acceptable as a medium of exchange
Shabana Reply
money ,currency
Hello plz,what is the full mean of tertiary?
al Reply
tertiary also called philoshper
tertiary means third..for example primary sector ,secondary and tertiary sector... means three number..
ru 9ice tnk
your most welcome.
what is money
what is a bank
a financial institution which holds money for its clients ,which collect deposit and lend money at interest and trades generally in money...
what is bankers draft ?kindly explain with example .
money "anything which is widely acceptable as a medium of exchange"
yes u ryt #shabana
difference between cost and price
Shallow definition
cost"the value of input that is the amount of money which is used to produce a good or service . price"an amount of money which has to b paid to buy something.
Tertiary is an adjective(pre position) for stages or levels and refers to "top, final, full term ." ; Advanced.
bank draft is a type of cheque which a person buy for to pay someone who is not willing to accept a personal cheque .
tertiary sector is an providing any kind of services.
primary sector is 'agriculture', secondary sector is ' industrial sector ,and the tertiary sector is ,' service sector' ,
subana are you understand now the meaning of bank draft?
what is golden- diamond paradox
what is occupational structure
Madhu Reply
occupational structure refers to the distribution of occupation on the basis of educational ,socoial ,income level in a society or economy
no that is not a exact meaning
than what is exact meaning
It refers to also the what is the average income of the person
what is deficit
Obiajunwa Reply
deficit = expenses > revenue
yeah expenses over revenue results in deficit
What is What is Equilibrium
Bright Reply
from business point of view it is that point where business revanu are equal to its expenses.
in economy where demand is equal to supply is called equalibrium
Equilibrium in economics is where quantity demanded is equal to quantity supplied
what are the objectives of devaluation

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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