Kinked demand

Abstract: The paper introduces a class of alternating-move infinite-horizon models of duopoly The timing is meant to capture the presence of short-run commitments Markov perfect equilibrium (MPE) in this context requires strategies to depend only on the action to which one's opponent is currently committed The dynamic programming equations for an MPE are derived The first application of the model is to a natural monopoly, in which fixed costs are so large that at most one firm can make a profit The firms install short-run capacity In the unique symmetric MPE, only one firm is active and practices the quantity analogue of limit pricing For commitments of brief duration, the market is almost contestable We conclude with a discussion of more general models in which the alternating timing is derived rather than imposed Our companion paper applies the model to price competition and provides equilibrium foundations for kinked demand curves and Edgeworth cycles

Abstract: T IS pretty well agreed among economists that the ordinary concept of a demand curve is inapplicable to the study of oligopoly. What would be sold at various prices if everything else remained unchanged does not concern an entrepreneur when he knows that everything else, and in particular the prices charged by his rivals, is most unlikely to remain unchanged. What does concern him is his own estimate of what can be sold at various prices, making the best allowance he can for the probable reactions of his rivals. These estimates can conveniently be arranged in the form of a demand schedule, but the result must not, of course, be confused with the type of demand schedule which is commonly used in economic discussion. Mr. Nicholas Kaldor has suggested the name "imagined demand curve" for the concept which is applicable to the oligopoly case, and in this article I propose to follow this usage.I So far as I know no attempt has yet been made to investigate the characteristics of imagined demand curves, though it should be obvious that such an investigation is desirable. Oligopoly is probably the typical case throughout a large part of the modern economy, and yet the theory of oligopoly can scarcely be said to be in a very advanced state, consisting as it does of a number of special cases which allow of little generalization. My purpose in this note is to show that a very considerable degree of clarification might be introduced into the study of this subject by a systematic inquiry into the nature of imagined demand curves. The most important consideration in this connection seems to me to be the obvious fact that rivals react differently according to whether a price change is upward or downward. If producer A raises his price, his rival producer B will acquire new customers. If, on the other hand, A lowers his price, B will lose customers. Ordinarily the reaction to a gain in business is a pleasurable feeling calling for no particular action; the reaction to a loss in business, however, is likely to be some viewing with

Abstract: The theory is an ingenious rationalization of the price rigidities that were reported in many statistical studies of prices during the thirties, and no doubt this explains its popularity. But no one, so far as I know, has examined in detail either the pure theory of the kinky demand curve or the degree of correspondence between the price patterns implied by the theory and the observed price patterns in oligopolistic industries. These two tasks will be undertaken in Parts I and II, respectively, of this paper. I. THE FORMAL THEORY

Abstract: This paper presents the results of a survey on price-setting behavior conducted on a large random sample of Swedish firms. The median firm adjusts the price once a year. State- and time-dependent price setting are about equally important. The four highest-ranked explanations for price rigidity in this study (implicit contracts, sluggish costs, explicit contracts, and the kinked demand curve) have close correspondents among the top five places in two similar large-scale surveys carried out in the UK and the U.S. The results point to the importance of the long-term relations with customers for the rigidity of prices (the estimated share of sales that go to regular customers is more than 80%).