2. Assume an oligopolist confronts two possible demand curves for its own output

Question

2.   Assume an oligopolist confronts two possible demand curves for its own output, as illustrated below. The first (A) prevails if other oligopolists don’t match price changes. The second (B) prevails if rivals do match price changes.

a) By how much does quantity demanded change if price is reduced from $10 to $4 and:

      i)    Rivals match price cut?

      ii)   Rivals don’t match price cut?

b) By how much does quantity demanded change if price is raised from $4 to $9 and:

      i)    Rivals match price hike?

      ii)   Rivals don’t match price hike?

Explanation / Answer

2.a.i. From the diagram we see that if price falls to $4 from $10 and if others try to follow that then DA will be 12units and DB will be 8units. Initially it was unit 6 and 4. So change=12-6=6 and 8-4=4.

ii. If rival don't follow the price cut then, DB is unchanged and the other one changes by the former amount.

b. i. If price rises from $4 to $9 then DA will be 6.5 and DB will be 4.5. So dDB=8-4.5=3.5 and the other>

By this amount quantity gets reduced.

ii. If rival don't match that then, only DA changes and that is also by former amount.

Generally if price rises then, rival don't follow but if it falls then, he follows. This is known as proportinal and perceived demand curve.

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