Kinked Demand Curve: The Demand or Average: Revenue

Kinked Demand Curve:
The demand or average revenue curve used in this analysis is Kinked. It

has a Kink or a knot. The demand curve is not a smooth straight line but has two segments with a
varying degree of flexibility or slope. Before we present the Kinked Demand Curve let us begin with
its underlying assumptions. Sweezy has made the following two assumptions:
i) If the firm reduces its price the producer expects other competitors to introduce a similar price

cut; the market demand will increase but the share of the firm will remain unaltered.
ii) If the firm raises the price then other competing firms will not follow the price rise. There will
be a very small rise in demand but a significant reduction in the sales of the firm.
The two assumptions suggest that neither a fall nor a rise in price would benefit the firm. Oligopoly
price is rigidly fixed. Moreover, such a price rigidity causes a Kink in the demand curve with its lower
segment steeper or inelastic and its upper segment flatter and more flexible. Consequently there is no
incentive to alter price under oligopoly. This will be clearer when explained with the help of a figure.
In Figure 44, there are two demand curves, DED, which is flatter and more flexible and D 1ED1, 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 D 1E 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.
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 PP 2 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 calledsticky price
solution.
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 MR 1 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.
Cartel
(A) Meaning of Cartel: By Cartel we mean a combination of several firms into a group sharing an
identical interest. When a large number of firms or industries join hands they enjoy extra power. They
can exert considerable influence on the market conditions. They can charge exorbitantly high prices
and exploit consumers. For this reason, cartels are normally banned in various nations. In some
implicit or explicit forms cartels do exist in different parts of the world. Generally cartel organizations
take undue advantages of the loopholes in the legal provisions. Cartels are theoretically akin to
monopolies but in practice are far more menacing and damaging in effect.
The best and most notorious example of cartels in the recent past is that of OPEC - Oil Producing
and Exporting Countries. Saudi Arabia and other countries after 1973 formed a cartel. As a result of
this petroleum prices rose exorbitantly, twice in the period between 1973 and 1978. The price hike of
petroleum products was more than 500 percent during the period. It rose from $6 per barrel to $32 per
barrel or more. This caused a tremendous rise in the cost of production all over the world. It led to a
prolonged recessionary phase in economic activities. Some other developing countries producing and
exporting products such as tobacco and cotton have also thought of forming cartels. This has not been
realized so far.
(B) Cartel Equilibrium: Cartel is a monopoly organization. Equilibrium under Cartel and monopoly
is identical in nature. Cartel equilibrium has been represented in Figure 48. Average and marginal cost
curves are similar to that of the monopolist. Similarly average and marginal revenue curves of a Cartel
are downward sloping like those of a monopolist.
The cartel attains equilibrium at point e with MR = MC where quantity sold is Q and price charged is
P. The profits of the cartel are of the Size CSRP.
Cartel is a dangerous form of market. It may possibly not survive as long as monopoly. This is
because the monopolist is a single producer while a cartel is a group of firms. Rivalry among cartel
members and certain underhand practices on their part may cause troubles.

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Kinked Demand Curve:

The demand or average revenue curve used in this analysis is Kinked. It

i) If the firm reduces its price the producer expects other competitors to introduce a similar price

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