Sweezy+oligopoly


 * Sweezy Oligopoly**

Michelle Bennett Richard Spaulding

According to Baye's //Managerial Economics and Business Strategy//, a sweezy oligolopoly is characterized by four things. 1) There are few firms in the market serving many consumers. 2) The firms produce differentiated products. 3) Each firm believes rivals will cut their prices in response to a price reduction but will not raise their prices in response to a price increase. 4) Barriers to entry exist.

The demand curve for a product competing in a sweezy oligopoly is kinked. The kinks shift when there is a change in price. Above the kink, demand is elastic and below the kink it is inelastic. Companies will not match competitor price increases, so that they can gain those competitor's consumers. However, they match price decreases since they don't want to lose their own consumer base. http://wps.aw.com/aw_carltonper_modernio_4/0,9313,1424971-content,00.html

One of the implications of a Sweezy oligopoly is that there will be a range in which changes in MC do not affect the profit-maximizing level of output. Firms have no incentive to change their pricing when marginal costs remain in a given range. This model is criticized since it gives no explanation as to how the initial price is set.

It is important to note that the Sweezy Oligopoly Model does not explain how the original price is set. (http://econ.ucsc.edu/grads/seanders/econ101/Ch9_sld.pdf )

1) True or False: Sweezy oligopoly firms produce identical products.
 * QUESTIONS:**

2) How do rivals respond to changes in prices in a Sweezy oligopoly? a. Increase prices when competitor increases prices b. Decrease prices when competitor decreases prices c. Increases prices when competitor decreases prices d. Decreases prices when competitor increases prices e. Do not do anything when competitor increases or decreases prices

3) True or False:Prices are rigid in a sweezy oligopoly.

4) When marginal cost declines for a firm operating in a Sweezy Oligopoly is it ever appropriate to continue producing the same level of output?

5) True or False: A Sweezy Oligopoly exists when many firms are competing for few customers.

6) In a Sweezy Oligopoly barriers to entry___________________. a. exist b. do not exist c. may or may not exist depending on the industry

7) True or False: In a Sweezy Oligopoly, competitors can routinely take advantage of one firms price increases, but will ignore one firms price decreases because so many firms are in competition that one firm is unable to effect change.

8) True or False: In a Sweezy Oligopoly a range exists where changing marginal cost does not change the profit-maximizing level of output.

Explanation: 1) False; One of the 4 characteristics of a sweezy oligopoly is that the firms produce differentiated products.
 * ANSWERS:**

2) B; One of the 4 characteristics of a Sweezy oligopoly is that firms believe rivals will decrease prices when they lower their prices, but not increase prices when they raise their prices.

3) True; In a Sweezy Oligopoly prices are rigid because if one firm lowers prices then competitors will lower their prices and if prices are raised by one firm other firms will not follow suit and will capture market share. (http://econ.ucsc.edu/grads/seanders/econ101/Ch9_sld.pdf - //Michael Baye's Managerial Economics and Business Strategy// McGraw-Hill Companies, Inc.)

4) Yes, in a Sweezy Oligopoly, when marginal cost declines it may be appropriate to continue the current level of output. (//Michael Baye's Managerial Economics and Business Strategy 5th Edition,// McGraw-Hill Companies, Inc.)

5) False; A Sweezy Oligopoly is characterized a few firms serving many customers. (//Michael Baye's Managerial Economics and Business Strategy 5th Edition,// McGraw-Hill Companies, Inc.)

6) A; Barriers to entry do exist in a Sweezy Oligopoly. (//Michael Baye's Managerial Economics and Business Strategy 5th Edition,// McGraw-Hill Companies, Inc.)

7) False; because a few firms are competing for many customers firms assume that rivals will match price decreases while ignoring price increases. (//Michael Baye's Managerial Economics and Business Strategy 5th Edition,// McGraw-Hill Companies, Inc.)

8) True; On the graph above, when MC goes from MC2 to MC1 the optimal quantity of output remains the same and; therefore,a range exists where changing marginal cost does not change the profit maximizing level of output. Further evidence of this can be found on pg. 319 of Michael Baye's text (//Michael Baye's Managerial Economics and Business Strategy 5th Edition,// McGraw-Hill Companies, Inc.)


 * ADDITIONAL LINKS:

http://cetai.hec.ca/leroux/exercices/Exercise%2024%20Sweezy.pdf (Contains additional Questions and Answers)**