D2(Rival matches your price change H 0 Rival holds its price const Q Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 P Q D1 P0 Q0 PL D2 (Rival matches your price change) P H (Rival holds its price constant)
D2 (Rival matches your price change) Demand if Rivals match Price Reductions but not price increases P I(Rival holds its price constan D Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 P Q D1 P0 Q0 D2 (Rival matches your price change) (Rival holds its price constant) D Demand if Rivals Match Price Reductions but not Price Increases
Key Insight The effect of a price reduction on the quantity demanded of your product depends upon whether your rivals respond by cutting their prices too The effect of a price increase on the quantity demanded of your product depends upon whether your rivals respond by raising their prices too! Strategic interdependence: You arent in complete control of your own destiny Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Key Insight • The effect of a price reduction on the quantity demanded of your product depends upon whether your rivals respond by cutting their prices too! • The effect of a price increase on the quantity demanded of your product depends upon whether your rivals respond by raising their prices too! • Strategic interdependence: You aren’t in complete control of your own destiny!
Sweezy (Kinked-Demand) Model Few firms in the market Each producing differentiated products Barriers to entry Each firm believes rivals will match(or follow) price reductions, but wont match (or follow) price increases Key feature of Sweezy Model a Price-Rigidity Michael R Baye, Managerial Economics and Business Strategy, 3e. CThe McGraw-Hill Companies, Inc, 1999
Michael R. Baye, Managerial Economics and Business Strategy, 3e. ©The McGraw-Hill Companies, Inc. , 1999 Sweezy (Kinked-Demand) Model • Few firms in the market Each producing differentiated products. • Barriers to entry • Each firm believes rivals will match (or follow) price reductions, but won’t match (or follow) price increases. • Key feature of Sweezy Model Price-Rigidity