Kinked demand curve - change in cost
In the discussion of non-collusive oligopoly, we shall focus our attention on the second of the three broad approaches identified on the previous page.
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Criticisms of the kinked demand curve theory
- The theory assumes that oligoplists perceive a kink at the current market price i.e. at point X, but it does not explain how or why the original price was chosen. As a theory, it is therefore incomplete as it does not deal with price determination.
- Price stickiness or rigidity in oligopolistic markets might, in practice, be more apparent than real; for example, in the market for new cars, published catalogue prices may remain constant over relatively long periods, but the common practices of offering discounts, and items such as free insurance, cash- back deals and interest -free credit all amount to ways of reducing price. In fact, the theory takes no account of the various forms of non-price competition which characterise most oligopolistic markets.
- There is little empirical evidence from firms operating in oligopolistic markets to substantiate the kinked demand curve hypothesis that a change in price by one firm will always evoke a predictable and uniform response from its rivals. In practice, a very wide range of possible reactions is probable.
- Any perceived stability in prices in oligopolistic markets may not be due to the existence of a kinked demand curve, but may occur for other reasons such as the administrative expense and inconvenience of altering prices too regularly.