Description                                  
In this presentation, the narrator explains how the kinked demand curve illustrates price rigidity. 

Oligopoly and Monopolistic Competition
The Kinked Demand Curve 
  
Audio Transcript 

Narrator: 
Economists have observed that prices and quantities tend to be quite stable over time in some oligopolistic markets. In such markets, the behavior of some firms is explained by the kinked demand curve model. 

Narrator: 
The predominant characteristic of oligopoly is interdependence. Marge is aware of Maggie's Emu Burger restaurant and pays attention to what Maggie does.  

Narrator: 
Let's assume that Marge and Maggie are currently charging the same prices for their burgers. The graph shows the quantity of burgers that Marge is selling at that price. Marge knows that if she were to lower her price, Maggie would also lower hers. Marge would sell more burgers but she would probably not take any customers away from Maggie. In other words, the demand for O-Burgers is relatively inelastic at prices lower than her current price. 

Narrator: 
Marge also knows that if she were to raise her price, Maggie would not raise hers. In that case, Maggie's Emu Burgers would become relatively less expensive than Ostrich burgers and Marge would lose business to Maggie. At prices higher than the current price, the demand for O'Burgers is relatively elastic. 

Narrator: 
There is a kink in the demand curve at the current price and quantity. The kinked demand curve has an associated marginal revenue curve that breaks at the point of the kink in demand. Marge, like any other profit maximizing firm, obeys the golden rule maximizing her profit where marginal revenue equals marginal cost. But the gap in the marginal revenue curve means that the marginal cost curve can fluctuate somewhat without effecting the profit maximizing price and quantity. This explains why price and output tend to be stable in some oligopolies. 

--End--           Back  

Copyright © 1998 South-Western College Publishing, All Rights Reserved.  
webmaster@swcollege.com