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Sweezy argued that an ordinary demand curve does not apply to oligopoly markets and promotes a kinked demand curve. From Queen's College in Oxford , Robert Lowe Hall and Charles J. Hitch wrote "Price Theory and Business Behavior," presenting similar ideas but including more rigorous empirical testing, including a business survey of 39 ...
The kinked demand curve for a joint profit-maximizing oligopoly industry can model the behaviors of oligopolists' pricing decisions other than that of the price leader. Above the kink, demand is relatively elastic because all other firms' prices remain unchanged.
Sweezy did pioneering work in the fields of expectations and oligopoly in these years, introducing for the first time the concept of the kinked demand curve in the determination of oligopoly pricing. [3] Harvard published Sweezy's dissertation, Monopoly and Competition in the English Coal Trade, 1550–1850, in 1938.
The graph below depicts the kinked demand curve hypothesis which was proposed by Paul Sweezy who was an American economist. [29] It is important to note that this graph is a simplistic example of a kinked demand curve. Kinked Demand Curve. Oligopolistic firms are believed to operate within the confines of the kinked demand function.
In order to distinguish themselves well, these firms can compete in price, but more often, oligopolistic firms engage in non-price competition because of their kinked demand curve. In the kinked demand curve model, the firm will maximize its profits at Q,P where the marginal revenue (MR) is equal to the marginal cost (MC) of the firm.
“A Theory of Dynamic Oligopoly II: Price Competition, Kinked Demand Curves and Edgeworth Cycles”, Econometrica 56, 1988. Eckert, Andrew and West, Douglas S., "Retail Gasoline Price Cycles across Spatially Dispersed Gasoline Stations", Journal of Law and Economics, Vol. XLVII, No. 1, April 2004, p. 245
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However, depending on the assumptions made in the theoretical model on the information available to all firms, there are some outcomes, based on Cooperative Game Theory, where collusion may have higher efficiency than if firms did not collude. [13] One variation of this traditional theory is the theory of kinked demand. Firms face a kinked ...