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Unit-16: Duopoly and Oligopoly: Cournot Model and Kinked Demand Curve

16.3 Price Determination Under Oligopoly Notes

To know the characteristics of oligopoly, we do further the study of price and production determination
by monopolistic firms. But we limit our analysation from the non-collusive monopoly model of Sweezy
and price determination and collusive monopoly model of Cartel.

1. The Sweezy Model of Kinked Demand Curve (Rigid Prices)

In a column in 1939, Prof. Sweezy proposed Kinked Demand Curve analysis for describing price
constant in monopoly market. Sweezy thinks that if monopoly firm decreases its price, then in reaction,
its opponents will cut their prices accordingly and regularly in fearing of losing the customer. Thus, the
firms which cut their price will not increase its demand. So this portion of demand curve is less elastic. In
contrast, if monopoly firms increase their price, then the opponent will not change their price. Thus, the
demand of that product would be less. So this portion of demand curve is respectively more elastic. In
both the conditions, kinked is found in the demand curve of monopoly firm which shows price stability.

The Cournot solution is not real because it gives zero cost in production.

Its Assumptions
The kinked demand curve theory of price stability is based on following assumptions—
(1) There are some firms in monopoly industry.
(2) The product of a firm is nearly substituted by other firms.
(3) Product is of single quality. There is no differentiation of product.
(4) No marketing cost.
(5) There is a fixed and current market price of product which satisfies all the sellers.
(6) The behaviour of every seller depends upon their opponents.
(7) If any seller tries to increase their selling by decreasing the product price, then all sellers will
follow and this technique will not fulfill the primary seller’s desire.
(8) If he increases the price then nobody will follow him and fulfill the consumer’s demand with
their existing price.
(9) The marginal cost curve crosses in the middle of kinked part of marginal revenue curve. So the
change in marginal cost is not affected to production and price.

Self Assessments

Multiple choice questions:
4. According to Marshall, Cournot model does not give solution to ......................... .
(a) possible (b) impossible (c) tried (d) none of these
5. Reaction curve analysis is helpful to Cournot model’s stable and .......................... equilibrium.
(a) unique (b) curve (c) cost (d) marginal
6. The region of monopoly of Prof. Mculp is ......................... .
(a) wide (b) two (c) four (d) none of these
7. As per criticism of Cournot model, the solution is ......................... .
(a) unreal (b) real (c) zero (d) none of these

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