Explain why the "kinked demand curve" model of oligopoly represents a game theory approach to oligopolistic behavior
What will be an ideal response?
Game theory usually is defined as studying how individuals form strategies when they are aware that their decisions affect the decisions of other which, in turn, will affect the outcome of their decisions. The "kinked demand curve" model is based on how firms perceive their competitors will react to any changes they make in their product prices, and how the expected reactions by competitive firms will affect firm profitability.
The typical assumption is that if the firm raises its product price, competitors will not raise their prices so that the firm will experience such a decrease in quantity sold that their total revenue and profit will decline. However, if the firm lowers its product price, competitors will match the price decrease so that the firm gains little or no increase in quantity sold, resulting in a decline in total revenue and profit. Under this expected behavior by competitors, firms should not alter their product prices in response to small changes in product costs.
You might also like to view...
Assuming all excess reserves are loaned out, if the reserve ratio is 3.33 percent, the money multiplier will be equal to
A) 0.67. B) 3.33. C) 6.67. D) 30.
As currently calculated, the CPI tends to overstate the true inflation rate because
A) we cannot know what the true inflation rate is. B) it fails to correctly measure quality changes for some products. C) the market basket selected is inappropriate. D) the market basket fails to weigh housing costs sufficiently.
Financial institutions use futures contracts as a means of
A) risk management. B) expanding capital. C) minimizing taxes. D) increasing assets.
The percentage of world GDP represented by the G7 is ________ and the percentage of world GDP represented by China and India is ________
A) falling; rising B) falling; falling C) rising; falling D) rising; rising