Page 297 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes Reasons for Price Stability

There are various reasons for price stability in some oligopolistic markets:
First, it might be possible for the sellers of oligopolistic market, that by experience they know that price
war is not better for them, so they prefer the price stability.
Second, it might be possible that they are not satisfied with current prices, production and profits and
not want to step in uncertainty.

Third, it might be possible that to protect incoming of firms in market, they will prefer price stability.
Fourth, Sellers can practice to increase their price rather than to decrease. It might be possible that they
prefer non-price competition than price war.
Fifth, after using a big money in advertising, they do not prefer to increase their price, so they will
prefer to stay with current price of product.
Sixth, if there is a new price due to any agreement then no seller will leave this agreement because if he
rises the price, others will follow and he can drop in uncertainty and become unsafe.
Last, Kinked demand curve comes brings stability in oligopolistic market.

Self Assessment

State whether the following statements are True/False:
8. Every seller’s behaviour depends upon his opponents.
9. Kinked demand curve brings price stability in oligopolistic market.
10. Sellers can practice to increase their price rather than to decrease.
11. Selling not always occurs on tagged price.
12. The kinked demand curve is based on two assumptions.

Its Shortcomings

But in oligopolistic price determination, kinked demand curve is not free from demerits—
(1) If we accept on each assumption, then it is not possible that the difference in marginal revenue curve
is so big to enter marginal cost curve. Price will be non-stable if demand or cost decreases.
(2) According to Stigler, the main reason behind this is that “Theory does not explain those prices which
are changed, why again retains and make a new kink slowly.” For example, in Fig. 16.4 kink is made
on P because OP is current price. But this theory does not explain that how OP was established.
0 0
(3) Price stability can be imaginary because it is not based on real behaviour of market. Selling not
always occur on tagged price. Generally, give some commission or rebate, sellers sell product with
some low prices. The oligopolistic seller can set fixed price, but by decreasing quantity of product
or quality. So price stability is illusionistic.

(4) Again, there are some products which show stable price but it is quite impossible to collect their
price range in numbers. So it is quite doubtful that price stability happens in oligopoly.
(5) Kinked demand curve is based on two assumptions. First, all other firms will follow the price cutting
and second, they do not follow price rising. Stigler has proved this that in inflationary situation, the
price rise in inputs is not in a single firm but it happens with industry. So all firms having similar
costs will follow each other. According to Stigler, “In historical base, a firm cannot believe that price
increment is not followed by opponents and price defects will be handled accordingly.”

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