 Sweezy’s 1942 contribution.  Samuelson immortalized it.  The “young” oligopoly case.  The industry starts out with price wars and gravitates toward “sticky prices.”

 There are two sets of demand curves: one where competitor’s respond to our initiative and one where they don’t. So we draw two sets of revenue curves.

D 2 =AR MR 2 With the blue revenue curves, our competitors do respond. With the pink revenue curves, our competitors do not respond

D1D1 QMR 1  We start with a price at the intersection of the blue and pink demand curves.  To the left of that point (also Q), when we raise our price, we act alone – nobody follows our increase.  When we reduce our price, competitors will follow and sales fall off rapidly. Not an appealing outcome!

D1D1 QMR 1 We can simply erase the dotted segments of the respective revenue curves, since they are not relevant to the outcome.

D1D1 QMR 1 To the left of Q, only D2 and MR2 are relevant, so erase D 1 +MR 1 to the left of Q. To right of Q, only D 1 and MR 1 are relevant, so erase D 2 and MR 2 to the right of Q.

D1D1 QMR 1 P Sweezy observed: At the intersection of D 1 +D 2 (the “kink”), we are in equilibrium. If we raise the price: Nobody follows us! If we reduce the price: everybody does!

Note the discontinuous segment of the firm’s MR curve! The MR curve becomes vertical at Q, so that there is no incentive to change the output, Q, or the price as long as the MC curve intersects the MR at that output. D1D1 QMR 1 P

D1D1 Q P MC Notice here that the MC cuts the MR at the discontinous segment of the MR curve

D1D1 QMR 1 P MC Notice that this gold MC curve could be shifting up gradually without changing Q or P.

D1D1 QMR 1 P MC Observe!

D1D1 QMR 1 P MC Unfortunately, the model does not show us what causes a new equilibrium price and quantity to be achieved, and how that happens.