Theory[ edit ] "Kinked" demand curves and traditional demand curves are similar in that they are both downward-sloping. They are distinguished by a hypothesized concave bend with a discontinuity at the bend - the "kink. Classical economic theory assumes that a profit-maximizing producer with some market power either due to oligopoly or monopolistic competition will set marginal costs equal to marginal revenue.
Under oligopoly, prices and output are indeterminate. Moreover, organizations are mutually dependent on each other in setting the pricing policy. Therefore, economists found it extremely difficult to propound any specific theory for price and output determination under oligopoly.
There is no unique general solution but merely many different behavioral models, each of which reaches a different solution. Figure-1 shows different oligopoly models: Let us discuss different oligopoly models as shown in Figure The kinked demand curve of oligopoly was developed by Paul M.
Instead of laying emphasis on price-output determination, the model explains the behavior of oligopolistic organizations. The model advocates that the behavior of oligopolistic organizations remain stable when the price and output are determined. This implies that an oligopolistic market is characterized by a certain degree of price rigidity or stability, especially when there is a change in prices in downward direction.
For example, if an organization under oligopoly reduces price of products, Sweezy oligopoly model competitor organizations would also follow it and neutralize the expected gain from the price reduction. On the other hand, if the organization increases the price, the competitor organizations would also cut down their prices.
In such a case, the organization that has raised its prices would lose some part of its market share. The kinked demand curve model seeks to explain the reason of price rigidity under oligopolistic market situations.
Therefore, to understand the kinked demand curve model, it is important to note the reactions of rival organizations on the price changes made by respective oligopolistic organizations. There can be two possible reactions of rival organizations when there are changes in the price of a particular oligopolistic organization.
The rival organizations would either follow price cuts, but not price hikes or they may not follow changes in prices at all. A kinked demand curve represents the behavior pattern of oligopolistic organizations in which rival organizations lower down the prices to secure their market share, but restrict an increase in the prices.
Following are the assumption of a kinked demand curve: Assumes that if one oligopolistic organization reduces the prices, then other organizations would also cut their prices ii.
Assumes that if one oligopolistic organization increases the prices, then other organizations would not follow increase in prices iii. A kinked demand curve model is explained with the help of Figure The slope of a kinked demand curve differs in different conditions, such as price increase and price decrease.
In this model, every organization faces two demand curves. Suppose the prevailing price of a product is PQ, as shown in Figure If one of the oligopolistic organizations makes changes in its prices, then there can be three reactions of rival organizations.
In such a case, consumers would switch to rivals, which would lead to fall in the sales of the oligopolistic organization.The Kinked-Demand curve theory is an economic theory regarding oligopoly and monopolistic lausannecongress2018.com demand was an initial attempt to explain sticky prices. The Cournot–Nash model is the simplest oligopoly model.
The model assumes that there are two "equally positioned firms"; the firms compete on the basis of quantity rather than price and each firm makes an "output of decision assuming that the other firm's behavior is fixed.".
Chapter 09 - Basic Oligopoly Models 4. Bertrand model of oligopoly reveals that Difficulty: Easy 5. Which of the following are quantity setting oligopoly models? Difficulty: Easy 6. Which of the following are price setting oligopoly models?93%(55). Oligopoly is a market structure with a small number of firms, none of which can keep the others from having significant influence.
The Cournot competition is an economic model in which. Marxian economics, or the Marxian school of economics, refers to a school of economic thought. Its foundations can be traced back to the critique of classical political economy in the research by Karl Marx and Friedrich lausannecongress2018.comn economics refers to several different theories and includes multiple schools of thought, which are sometimes opposed to each other, and in many cases Marxian.
Three Important Models of Oligopoly: Three Important Economic Models of Oligopoly are as: (1) Price and output determination under collusive oligopoly.