Comment upon the discontinuous shape of the Marginal revenue curve under this model : In the kinked demand curve model of oligopoly, the marginal revenue curve exhibits a discontinuous shape.
This discontinuity arises from the assumption that the price elasticity of demand changes abruptly at the kink of the demand curve.
Here’s a more detailed explanation of the discontinuous shape of the marginal revenue curve under this model:
- Elastic Segment Above the Kink:
In the elastic segment of the demand curve (above the kink), the assumption is that a firm’s competitors will not follow price increases, making the demand more price-sensitive. As a result, a small increase in price would lead to a proportionally larger decrease in quantity demanded, causing marginal revenue to be negative.
- Inelastic Segment Below the Kink:
In the inelastic segment of the demand curve (below the kink), the assumption is that competitors will match price decreases, resulting in a more price-insensitive demand. Again, the discontinuity is caused by the sudden shift in elasticity and consumer behavior.
The abrupt shifts in the elasticity of demand at the kink create these two distinct segments of the marginal revenue curve:
a negatively sloped segment above the kink and a positively sloped segment below the kink. This discontinuous behavior reflects the differing reactions of consumers to price changes based on the assumptions of the kinked demand curve model.
The abrupt shifts in the elasticity of demand at the kink create these two distinct segments of the marginal revenue curve:
A negatively sloped segment above the kink and a positively sloped segment below the kink. This discontinuous behavior reflects the differing reactions of consumers to price changes based on the assumptions of the kinked demand curve model.
It’s worth noting that the discontinuous shape of the marginal revenue curve in this model is a simplification for analytical purposes and may not accurately capture the complexities of real-world market interactions.