Edited by Mark Blaug and Peter Lloyd
Chapter 19: Kinked Demand Curves
R. Rothschild The ‘kinked demand curve’ (KDC) is one of several early attempts to characterize the demand for the output of a firm under oligopolistic market conditions. Although it holds relatively little appeal for modern writers who work within a game-theoretic framework, it remains an intuitively plausible explanation of firms’ behavior in practice. Early discussions of the concept that underlies the KDC can be found in the work of Hayes (1928), Kahn (1929) and Sweezy (1937, 1938), amongst others (for an excellent survey, see Reid, 1981). However, its formalization – or at least the version that will be familiar to contemporary students – is to be found in work published almost simultaneously by Sweezy (1939) in the USA, and Hall and Hitch (1939) in the UK. While Sweezy’s contribution to the articulation of what he termed the ‘imagined demand curve’ was an essentially theoretical one based on informal interviews with businessmen, that of Hall and Hitch was based upon the results of a detailed study of costing and pricing behavior carried out in 38 firms. However, in both cases it is apparent that the motivation for the model rests upon a recognition of the practical considerations that surround the setting of prices in oligopolistic industries. The most familiar variant of the KDC diagram is made up of two figures that appear in Sweezy’s 1939 article. The model focuses on a single firm in an N-firm oligopoly, in which all competitors have identical costs and produce varieties of a product that are, in...
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