| What does the Kinked Demand Curve assume? | -Price Stability is Visualised by the Kinked Demand Curve
-When a Firm raises its Prices, the other Firms will NOT raise their own
-When a Firm drops its Prices, the other Firms WILL raise their Prices. (Threat of making a Loss too) |
| Explain how the Kinked Demand Curve works | -When a Firm raises its Prices, it will see a Large Drop in its Demand. Consumers are going to Switch to their Rivals. Thus, the Demand Curve is Price Elastic
-When a Firm lowers the Price, the Market Share won’t really Increase. All other Firms will Drop prices else it will lose Revenue. When Prices fall, demand is Price Inelastic. |
| What is the Outcome from the Kinked Demand Curve
-Is it seen in all Oligopolistic Markets? | -Result of the Kinked Demand Curve shows that Firms have no Interest to Change their Prices. Both will end up being a Loss for them
-This isn’t seen in All Markets though. The Assumptions may be not always Best Suited for the Oligopoly, and this, its hard to Predict the Behaviour
-Furthermore, Price Drops and Increases can be due to Non-Price Factors (Quality) |
| What is Game Theory and how does it tie in with Economics? | -Game Theory comes from Maths. It is when 2 or more ‘Playerss’ (Economic Agents, Firms, Governments..) are working out what to do to Enhance and Push more their Interests
-The Outcome of each ‘Player’ stems from their Own Choices, and the Choices from Everyone Else. They are all Interdependent.
-Ties in with Economics, as Rational Theory suggests that Economic Agents act in their own Self Interest. |
| How can the Prisoners’ Dilemma show First-Mover Advantage (And the Problem with Informal Collusive Oligopolies) | -Suppose Apple and Samsung are the only 2 Firms in the Smartphone Industry.
-Each of them must decide how much Output to Make. Low or High
-Apple and Samsung Knows that the Other Firm is trying to Guess what Their Output will be.
-Apple and Samsung know that their Own Choices affect the Other.
-The Result is a Payoff Matrix, where Both can Win, Lose, or one can Win.
(Both Win = Both pick Low Output)
(Both Lose = Both pick High Output)
(Apple Win = Samsung makes Low, Apple makes High, and vice er versa) |
| Why may First-Mover actually Disadvantage the Cheater? | -The Payoff Matrix may work Against the Firm that is attempting to Move First. Say the 'First Mover' can get a Huge Profit
-If they Overestimate Demand, they risk making Huge Losses and risk Collapsing
-Rivals can use the Technology the First Mover had Researched and Developed for a Lot Less. |
