Curriculum
- 10 Sections
- 10 Lessons
- Lifetime
- 1. The Impact of Tariff Barriers on Bilateral Trade Between Country A and Country B (Mock Up)1
- 2. The Economic Dilemma of Sole Dependency on the Tourism Sector (Mock Up)1
- 3. Understanding Kinked Demand in an Oligopolistic Market (Mock Up)1
- 4. Navigating an Economic Crisis in a Production Company (Mock Up)1
- 5. Balancing Demand and Supply of Wheat Amidst Weather-Induced Shortage (Mock Up)1
- 4. The Economic Impact of Privatization on Employment and GDP (Mock Up)1
- 7. The Economic Impact of Credit Card Fraud on GDP (Mock Up)1
- 8. Navigating Import Duties and Local Manufacturing Challenges for a Shoe Startup (Mock Up)1
- 9. The Controversy of Government Bailouts in the Financial Sector (Mock Up)1
- 10. Misallocated Government Budget and Inflation in the FMCG Sector (Mock Up)1
3. Understanding Kinked Demand in an Oligopolistic Market
Introduction
This case study examines the concept of kinked demand in an oligopolistic market, where a few large firms dominate. We will explore how these firms compete, how the kinked demand curve theory explains price rigidity, and the strategic interactions among firms. Students are tasked with analyzing a fictional market scenario, identifying key issues, and proposing strategic actions for firms within the market.
Background of the Market
Overview of the Oligopolistic Market
In the fictional country of Marketland, the smartphone market is dominated by four major firms: AlphaTech, BetaMobile, GammaGadgets, and DeltaDevices. Collectively, these firms control 90% of the market share, creating an oligopolistic market structure.
Market Characteristics
- High Entry Barriers: To enter the market, significant capital investment and technological expertise are required.
- Interdependence: The actions of one firm directly affect the others.
- Non-Price Competition: Firms compete through advertising, product differentiation, and customer service rather than price changes.
Key Concepts: Kinked Demand Curve Theory
Theory Overview
The kinked demand curve theory suggests that firms face a demand curve with a “kink” at the current price level in an oligopoly. This kink results in different elasticities for price increases versus price decreases:
- Price Increase: If a firm raises its prices, competitors will not follow, leading to a significant loss in market share. The demand is elastic above the kink.
- Price Decrease: If a firm lowers its prices, competitors will match the decrease to avoid losing market share, resulting in a more minor increase in quantity demanded. The demand is inelastic below the kink.
Implications
- Price Rigidity: Prices tend to remain stable because firms are reluctant to change prices due to the potential adverse effects on market share and profits.
- Strategic Behavior: Firms focus on non-price competition and strategic alliances to maintain their market position.
Scenario: The Smartphone Market in Marketland
Current Market Situation
In Marketland, the four dominant firms have maintained stable prices for the past three years. To gain a competitive edge, they have focused on improving product features, investing in advertising, and enhancing customer service.
Recent Developments
- Technological Breakthrough: AlphaTech has developed a new battery technology that significantly extends smartphone battery life.
- Economic Downturn: A recent economic downturn has reduced consumer spending, affecting overall market demand for smartphones.
- New Entrant: EcoSmart is a new company attempting to enter the market with environmentally friendly smartphones at competitive prices.
Firm Responses
- AlphaTech: Considers whether to raise prices to reflect the new technology or keep prices stable to avoid losing market share.
- BetaMobile and GammaGadgets: Monitor AlphaTech’s actions and consider whether to invest in a similar technology or focus on other features.
- DeltaDevices: Focuses on cost-cutting measures to offer lower prices without initiating a price war.
Tasks for Students
Task 1: Demand Analysis
Analyze each firm’s kinked demand curve. Determine the potential impact on market share and profitability if AlphaTech increases prices due to its new battery technology.
Task 2: Strategic Response
If AlphaTech increases its prices, propose strategic responses for BetaMobile, GammaGadgets, and DeltaDevices. Consider both price and non-price competition strategies.
Task 3: Entry of EcoSmart
Evaluate the potential impact of EcoSmart’s entry into the market. How should the existing firms respond to this new competition? Consider pricing strategies, product differentiation, and potential collaborations or mergers.
Task 4: Economic Downturn
Assess how the economic downturn might affect the kinked demand curve and the firms’ pricing strategies. Propose measures each firm can take to maintain profitability and market share during the downturn.
Task 5: Long-Term Strategy
Develop a long-term strategy for one of the firms (AlphaTech, BetaMobile, GammaGadgets, or DeltaDevices) to sustain a competitive advantage in the oligopolistic market. Consider innovation, market expansion, and strategic partnerships.
Conclusion
The case of the smartphone market in Marketland provides a detailed example of the kinked demand curve theory and its implications in an oligopolistic market. Students are tasked with analyzing the complex interactions among firms, understanding the strategic considerations, and developing actionable plans. This case study fosters critical thinking and a deeper understanding of market dynamics and firm behaviour.