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Why would firms wish to collude? Eco Help!

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Hey Guys!

 

I wanted to asks about this question that came in a paper a few years ago. When I saw it, I instantly thought about writing about Game Theory. However, int he mark scheme, there was no mention and I predict I would have scored very badly.

 

Can anybody explain to me when should I use the Kinked Demand model and when should I use game theory to explain oligopolies?

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Hello there, Economics Paper 1 is tomorrow so I think this is a good time for me to answer it as quickly as possible so you can be less nervous. 

Kinked demand model is for non-collusive oligopoly, when a question asks you to draw a graph of non-collusive oligopoly, use kinked demand. Bare in mind that the kinked demand model has two MC curves along the discontinuous MR to show price rigidity, which is a trait for oligopoly. . 

Game theory reflects the interdependence of firms, it shows the benefits of collusion for both formal and informal collusion.

If a firm cut the price, it will suffer a loss if it doesn't collide due to other firms cutting the price too, or if the firm leaves the price unchanged  For both firms, they will be better off if they choose to cut the price after considering actions of the competitor, ultimately, assuming they are profit maximizing firms, they will want to cut price in order to increase the chances of getting more revenue, but in reality, they do not because the other firm will follow rival's price decrease. However if they collide, once they know the decision of competitors, they will seek the best way to cooperate to maximize their profits, like keeping the price unchanged.

Good luck. 

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1 hour ago, IBsurvivor98 said:

So if a question asks why might firm want to collude, shouldn't I use game theory?

Yes, game theory will be appropriate, or if it is time-consuming, draw one for kinked demand and one for colluded firm and explain what advantages why firms want to collude

Edited by inriya

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9 hours ago, inriya said:

Yes, game theory will be appropriate, or if it is time-consuming, draw one for kinked demand and one for colluded firm and explain what advantages why firms want to collude

If not, if I am answering this question, I will do a comparison between non collusive and collusive oligopoly tk compare advantages and disadvantages.  It's like comparing oligopoly and monopoly in a sense, so you can lay out different stakeholders' views.  Producers would prefer colluded firms, society and consumers will not. 

I am not surprise game theory isn't,  because it requires much sophisticated explanation and takes a long time to write. 

 

Don't worry so much, Econ is flexible. 

Good luck for today 💕 

Idk what year paper is this but I have done it before. 

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That moment when this post basically came out for the exam!

On 5/1/2016 at 0:36 PM, inriya said:

Hello there, Economics Paper 1 is tomorrow so I think this is a good time for me to answer it as quickly as possible so you can be less nervous. 

Kinked demand model is for non-collusive oligopoly, when a question asks you to draw a graph of non-collusive oligopoly, use kinked demand. Bare in mind that the kinked demand model has two MC curves along the discontinuous MR to show price rigidity, which is a trait for oligopoly. . 

Game theory reflects the interdependence of firms, it shows the benefits of collusion for both formal and informal collusion.

If a firm cut the price, it will suffer a loss if it doesn't collide due to other firms cutting the price too, or if the firm leaves the price unchanged  For both firms, they will be better off if they choose to cut the price after considering actions of the competitor, ultimately, assuming they are profit maximizing firms, they will want to cut price in order to increase the chances of getting more revenue, but in reality, they do not because the other firm will follow rival's price decrease. However if they collide, once they know the decision of competitors, they will seek the best way to cooperate to maximize their profits, like keeping the price unchanged.

Good luck. 

 

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22 hours ago, IBsurvivor98 said:

That moment when this post basically came out for the exam!

 

HHAHAHAHAHAAHAHA OMG  i can't believe this I got that in the exam

Edited by ~Lc~
Please refrain from using capitals...
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