The lower segment ED1
of the demand curve is steeper. Even with a significant fall
in price from P to P1 increase in the quantity demanded
QQ1 is very small. Reduction in price will then result
in a smaller total revenue for the firm. On the other hand, any
attempt to cause a small rise in price as PP2
on the flatter portion ED of the demand curve causes a significant
fall in the quantity demanded from Q to Q2. This again
will cause total revenue of the oligopolist to be smaller at higher
price. The oligopolist is rigidly fixed at E, the point of Kink
with P as the price. This therefore is also called sticky price
Oligopoly analysis (such as the above) has been carried out exclusively in terms of demand or average revenue curve. So long as oligopolists find the average revenue higher than the average cost of producing equilibrium output, they will make profits. Any reference to the marginal cost of a firm is not necessary in such an analysis. Therefore it is also called Full Cost (not marginal cost) Oligopoly Equilibrium Solution. Even if we desire to bring in the marginal revenue and the marginal cost curves into the discussion that does not alter the equilibrium attainment of the firm. This can be seen in Figure 47.
We have two marginal revenue curves MR and MR1
corresponding to the average revenue curve segments DE and ED1
respectively. The two marginal revenue curves are broken and the
broken portion is along the vertical line EQ. Marginal cost curve
of the firm passes from the broken portion of the marginal revenue
curve. The equality between MR=MC is also fulfilled for the same
output level Q and price P. The Kinked demand curve appears to be
satisfactory in every respect.
However, the Kinked demand curve solution has also come under some criticism. Sweezy's behavioral assumptions are doubted. Once the Kink position is known the rest of the analysis follows; however, how to determine the Kink is not stated.
All Contents Copyright
© All rights reserved.
Further Distribution Is Strictly Prohibited.