KINKY DEMAND CURVE

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KINKY DEMAND CURVE
It is Impossible to find a single centralised solution III the problem of oligopoly pricing. This is because or the difficulty of knowing the exact position 01 the demand curve racing a firm under oligopoly. This in turn is due (. , he fact that the effect of a given price change by a seller on the demand for his product depends very much on the reaction of his rivals and.
a~ we explained earlier rival consciousness is a basic characteristic of oligopolistic situations. As for the possible reactions of the rivals. there can be any number of hypothesis, Under some circumstances, a price cut by a seller may pass unnoticed by his rivals; at other times. it may invite immediate retaliation, so that the position and the shape of the demand curve of a finn under oligopoly will vary with the hypothesis that we adopt about the reaction to its moves on the part of the rival firms, There is. however. one particular shape of demand curve under oligopoly which has become very popular. i.e.. the kinky demand curve. This curve is drawn on the assumption that the kink in the curve is always at the ruling price, Taking the ruling price as given. it assumes that a rise in price (beyond the ruling price) on the part of a given firm under oligopoly. will not invite retaliation from the rivals, i.e. they will not come forward with a price increase of their own to neutralise the effects of price increase by the first seller. Rather. they will allow him to raise his price and lose customers to his rivals. so that the upper part of the curve is more elastic than the part of the curve lying below the kink. This is because a price cut (below the ruling price) will invite immediate retaliation from the rivals who wish to protect their own sales. The result will be that if a firm under oligopoly lowers its price. it cannot push up its sales very much because the rival firms also follow suit with a price cut. so that there arc no customers to be drawn from the rivals, Hence, the lower part of the demand curve is less elastic than the upper one,

Having drawn the demand curve, IVl’ can draw the corresponding marginal revenue curve notice that there is a discontinuity in the marginal revenue curve just below the int corresponding to the kink. Next we van uraw the marginal cost curve (Me), The equilibrium (II’ the firm will be at the point where marginal revenue equals marginal cost. We shall further notice that, because of discontinuity in the marginal revenue curve. shifts in the marginal cost curve between the points T and Swill not alter the equilibrium position as regards output and prices. The linn helps to explain an often observed phenomenon under oligopoly described earlier that despite considerable \:ariations in cost and demand. the price under oligopoly remains unchanged. The kinky solution as given above is only one of the possible solution of uligopoly pricing and anumbcr of variations arc possible. This solution. therefore. cannot he accepted as a generalised solution. Indeed it is no solution at all. because we start with the assumption that the kink is always at the ruling price, which is supposed to be, therefore, already known. But if the price is already known, what is there to he investigated? of course. the kinky solution offers all explanation of ‘Sticky’ prices under oligopoly. but this call be explained in many other ways also and we need not. therefore. labour too much on kinky solution for this purpose alone.

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KINKY DEMAND CURVE