Variations
According to neoclassical price-determination theory and game theory, the independence of suppliers forces prices to their minimum, increasing efficiency and decreasing the price determining ability of each individual firm. However, if firms collude to all increase prices, loss of sales is minimized, as consumers lack alternative choices at lower prices. This benefits the colluding firms at the cost of efficiency to society.
One variation of this traditional theory is the theory of kinked demand. Firms face a kinked demand curve if, when one firm decreases its price, other firms will follow suit in order to maintain sales, and when one firm increases its price, its rivals are unlikely to follow, as they would lose the sales' gains that they would otherwise get by holding prices at the previous level. Kinked demand potentially fosters supra-competitive prices because any one firm would receive a reduced benefit from cutting price, as opposed to the benefits accruing under neoclassical theory and certain game theoretic models such as Bertrand competition.
Read more about this topic: Collusion
Famous quotes containing the word variations:
“I may be able to spot arrowheads on the desert but a refrigerator is a jungle in which I am easily lost. My wife, however, will unerringly point out that the cheese or the leftover roast is hiding right in front of my eyes. Hundreds of such experiences convince me that men and women often inhabit quite different visual worlds. These are differences which cannot be attributed to variations in visual acuity. Man and women simply have learned to use their eyes in very different ways.”
—Edward T. Hall (b. 1914)