Demand curve facing each firm

Question:

(1) Suppose the jeans industry is an oligopoly in which each firm sells its own distinctive brand of jeans, and each firm believes its rivals will not follow its price increases but will follow its price cuts.

Draw and explain the demand curve facing each firm, and given this demand curve, does this mean that firms in the jeans industry do or do not compete against one another?

Answer:

The demand curve facing the firms in the industry has two parts: one elastic part above K and one inelastic part below K. If one firm raises the price above P, it loses its market share. However, if it cuts the price then the competitor follows suit and the gains are not that much. Therefore, the demand curve is inelastic below K. This is the reason for the "kink" at K.

The firms do compete even in these markets, but it is mainly based on product differentiation and advertising. So, aggressive advertisement can increase the market share of a firm. Also, special features in jeans, different shades, and other similar strategies are the main source of competition in this industry.

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