PRICE LEADERSHIP AND

STABILITY IN OLIGOPOLY
A2| Econ | Francis
OUTLINE
➤ Price stability: the kinked demand curve
➤ Price leadership: lower cost pricing
➤ Price leadership: dominant firm pricing
➤ Price leadership: barometric pricing
➤ Collusion
KINKED DEMAND
CURVE
➤ A)
➤ B)
➤ C)
KINKED CURVE
ASSUMPTION
➤ A) homogeneous product SOL
➤ B) no collusion between firm
➤ C) rival firms will match price cuts but not
price hikes
KINKED DEMAND
CURVE
➤ Draw the kinked demand curve

➤ Show how this K-Demand curve encourage

price stability with a diagram
KINKED DEMAND
CURVE SOL
PRICE LEADERSHIP :
LOWER COST PRICING
➤ Draw a diagram to show price leadership with
lower cost pricing
PRICE LEADERSHIP : LOWER
COST PRICING SOL
➤ Draw a diagram to show price leadership with
lower cost pricing
PRICE LEADERSHIP
DOMINANT FIRM PRICING
➤ What are the assumption for dominant firm
pricing?

➤ Draw 2 diagrams (market and individual

levels) to explain this price leadership
DOMINANT FIRM
PRICING
➤ (HINT):
Hint: start buy drawing D without the
dominant firm
➤ Deduce what is the individual D
➤ On individual D insert MC
➤ Deduce the market price
DOMINANT FIRM
PRICING SOL
COLLUSION
➤ What are the conditions that make collusion
more likely to happen?
➤ A)
➤ B)
➤ C)
➤ D)
COLLUSION SOL
➤ What are the conditions that make collusion
more likely to happen?
➤ A) small number of participants and strong
trust between them
➤ B) a clear leader
➤ C) the government fails to intervene
➤ D)agreement can be enforced
COLLUSION: CARTEL
➤ A cartel has decided to set P and Q
➤ On the right diagram, show the individual
profit
COLLUSION:
SOLUTION
➤ The individual Quota and abnormal profit
COLLUSION II
➤ Can the firm further maximise profit?
COLLUSION II:
SOLUTION
➤ The firm is tempted to offer a little discount or
hidden discount to max out profit
COLLUSION III
➤ Q: why is it likely that Q that maximises
profit be greater that the allocated quota?
(Namely, on the right of the cartel desired
equilibrium)
COLLUSION III:
SOLUTION
➤ Q: why is it likely that Q that maximises
profit be greater that the allocated quota?
(Namely, on the right of the cartel desired
equilibrium)