Page 295 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes The Model

By these assumptions, the relation between price and production in monopoly market is described
in Fig. 16.3. In the figure, KPD is a kinked demand curve and OP is the current price of a seller
0
in oligopoly market. For quantity OR, starting from P for current price OP and above, the price
0
increment will decrease the selling of that product because it does not hope that its opponent will
follow this tactic. The reason behind this is that the KP part of kinked demand curve is elastic and
KA part of MR curve is positive. So if price increases then its total revenue and profit will decrease as
well as total selling too.
On the other hand, if seller drops its price by OP (= P) then its opponent will also follow him. However,
0
its sell will increase but the profit will be low. The reason behind this is the PD of kinked demand curve
below P is less elastic and the below part of R of marginal revenue curve is negative. Thus seller will
not get any profit, however, it decreases or increases the price. It will be on current market price OP
0
which is rigid.

Fig. 16.3

K

Price and cost P 0 P

A

B D MC
O R
MR
Quantity

To know the process of kinked demand curve, now we analyze the effect of changes in demand stage
and cost in pricing in oligopoly market.

Changes in Costs—In oligopoly stage, analysation of kinked demand curve, the current price is not
affected by change in fixed cost. Suppose that the cost of production drops by this new MC curve
goes into right side MC which is shown in Fig. 16.4. It intersects in difference AB to MR curve by
1
which profit maximization product is OR which can sell on OP price. It must be known that, however,
0
price drops, new MC curve will cut MR curve in difference, because as price falls, the difference AB
widens by two reasons – (i) as soon as cost drops, the KP part of demand curve will more elastic
because it defines that the increment in price will not follow by their opponent and their sell will drop
(ii) By dropping of cost, PD part of kinked curve will be non-elastic because it definines that decreasing
of price will follow by all sellers.

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