1. A firm that is an oligopolist is thinking about lowering the price of the sta
ID: 1095982 • Letter: 1
Question
1. A firm that is an oligopolist is thinking about lowering the price of the standardized product it produces. This firm's own demand function is elastic, but market demand is inelastic. The firm that is thinking about lowering price knows that its' rivals will match the move. Do you think the potential price cut is a good idea? Analyze the situation and fully explain your reasoning.
2. Price has been the same for several years in an industry that has just a few sellers. One of the firms in this industry decides to raise the price of its product. Rival firms do not raise their prices, instead they stick with the old mutually interdependent industry price. How will the price increase work out for the firm that broke ranks and increased price? Was that price increase a good idea? Why or why not? Explain your analysis fully.
Explanation / Answer
1.Since the firm's demand function is elastic, a decrease in the price will get the firm more customers and it can take advantage of higher volume and consequent higher profit. It is assumed that the elasticity of the firm is positive and a reduction in price will lead to higher increase in quantity. But since the industry is inelastic , the overall demand will remain same and hence customers from competitors will flux towards this firm. As and when competitor notice this trend , they will also reduce the price and ultimately the firm will lose the additional customers and have to operate at a lower price and lower quantity.
2.In the industry there are few sellers , means it is a oligopoly market. Here , an increase in price will be negatively viewed by the customers as the undifferenciated product is available at others at a lower price. If the product is differenciated , people will pay a premium till the competitor imitates and gives similar product at lower price. Therefore though in the short run the firm can get more higher price , in the long run it has to come down to the industry price.
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