In Figure 44, there are two demand curves, DED, which is flatter and more flexible and D₁ED₁, which is steeper and less flexible. The two demand curves interest at point E which itself is a point of Kink. The upper portion of the flatter demand curve DE and the lower portion of the steeper demand curve ED₁ together make up the Kinked Demand Curve. Under the above stated assumptions the lower portion of the flatter demand curve ED and the upper portion of the steeper demand curve D₁E are not operative. Taking into account only relevant segments of the two demand curves a Kinked demand curve DED₁ has been formed and presented in Figure 45.

Once we locate the point of Kink there is no further problem in oligopoly analysis. The point of Kink, E, is itself an equilibrium point. At such a point equilibrium output produced is Q and price charged is P.

(D) Oligopoly Equilibrium: Once a Kink in the demand curve is known and given, oligopoly equilibrium automatically follows. The point of Kink such as E is itself an equilibrium point. Moreover, such an equilibrium is rigid and stable. There is no incentive on the part of the oligopolist to move away from the point of Kink. Any attempt on his part either to lower or raise the price will not be to his advantage. This can be explained with the help of Figure 46.

Index

Chapter 13