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Criticism of the Kinked Demand Curve Model

Here we understand about the Criticism of the Kinked Demand Curve Model in detail.

Criticism of the Kinked Demand Curve Model
Before we discuss about the Criticism of the Kinked Demand Curve Model, we first discuss what is Kinked Demand Curve Model.
Kinked Demand Curve Model:
The kinked demand curve model introduced to explain the rigidity of prices in oligopoly. This model is based on the assumption that rival firms do not respond when a firm raises its price, but they do respond when a firm lowers its price.
Now we will discuss the Criticism of the Kinked Demand Curve Model:
The model of kinked demand curve in oligopoly pricing has been criticised on the following grounds:
  1. The stability of price may be illusory, because it may not be based on the actual market behaviour. The oligopolistic seller may outwardly keep the price stable but he may reduce the quality or quantity of the product.
  2. This model analysis holds during the short run when the reactions of the rival produces can be guessed. But, since it is difficult to guess rival's reactions correctly, the theory not applicable in the long run.
  3. This model is based on the assumption that other firms will follow a price cut, they will not follow a price rise. Professor Stigler has shown on empirical evidence that this assumption is not true in an inflationary situation. In inflationary situation when demand curve increases the oligopolistic firm will raise price and other firms will also follow it. In short kinked demand curve analysis is applicable only under depression.
  4. Economists Sweezy, Hall and Hitch explain price rigidity on the basis of the kinked demand curve assumption. They do not explain the determination of the price itself.
Kinked Demand Curve Model
Explain the rigidity of prices in oligopoly
Criticism of the Kinked Demand Curve
Kinked Demand Curve Model- Criticism of the Kinked Demand Curve Model.
Kinnari
Tech writer at NewsandStory
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