A firm in an oligopolistic industry has identified two sets of demand curve. If the firm is the only one that changes price (i.e., other firms do not follow), its demand curve takes the form: Q = 82 – 8P (1) with MR = 10.25 - 0.25Q. If it is expected that competitors will follow the price action of the firm, the demand curve is of the form: Q = 44 – 3P (2) with MR = 14.66 – 0.66Q [from HW]
a. Find the price and the quantity at the intersection of two demand curves with a kink.
b. Identify the portions of the two demand curves, with “L shape above the kink” and the portion of the other two demand curves with “reverse L shape below the kink.”
Discuss the difference in implication behind the portions of two demand curves, one “L shape” above the kink and the other “reverse L shape” below the kink. Explain which one is considered to be “optimistic” and which one, “pessimistic” and why?
c. Calculate the range of marginal revenues on the vertical portion of the MR curves at the level of output where there is a 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, similar to Prob. #1 above. 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? Why or why not?
e. What would happen to the price and the quantity implied above 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? In which case, in (e) or in (f) is price more likely to change and why?
g. What does this kink demand curve example try to teach us in view of the questions asked so far?