Question

Answer the following questions about the kinked demand curve:

a) How is the kinked demand curve formed?

b) What are the marginal cost implications of the kinked demand curve?

c) How is it different from the demand curve in the Cournot model?

Answer 1

a) A kinked demand curve indicates the behavior approach in the oligopolistic organizations wherein the competitor organizations reduce the prices to secure their share in market, however restrict an increase in the prices. Thus the firm at the prevailing price level faces a demand curve with a kink. The curve will be less elastic below the kink and more elastic above the kink. It shows that the response to a price increase will be less than the response to a price fall

b) Due to the kinked nature of the demand curve, an output range exists in the marginal revenue curve is vertical such that any change in marginal cost do not impact the profit-maximizing output level and consequently the price level

c) In the Cournot model the competing firm choose a quantity to produce simultaneously and independently; and is applicable wherein the firms produce standardized or identical products and it is assumed they cannot form a cartel or collude. On contrast the kinked demand curve is indicates the behavior approach in the oligopolistic organizations which can collude and join a cartel