The equilibrium of the firm is defined by the point of the kink

because for any output level less than OM, MC is below MR while
for any output level greater than OM, MC is greater than MR.
Thus, total profit is maximized at the kink though the profit
maximizing condition (MR = MC) is not fulfilled at the kink point.
If the demand curve is kinked, a shift in the market demand
upwards or downwards will affect the volume of output but not the
level of price, so long as the cost passes through the
discontinuous range of the new MR curve. In this instance, as the
market expands, the firm will not raise its price, although output
will increase. This is due to the fact that cost continues to pass
through the discontinuity of the new MR curve and hence there is
no incentive to change price.

1.4 SUMMARY
1. An oligopoly is market form in which a market is dominated by a
small number of sellers (oligopolists). Because there are few
participants in this type of market, each oligopolist is aware of the
actions of the others.

2. An Oligopolist faces a downward sloping demand curve;

however; the price elasticity depends on the rivals reaction to
change its price, investment and output.

3. OPEC is an example of Oligopoly since few countries control the

production of oil. OPEC acts as a cartel. If OPEC and other oil
exporters did not compete, they could ensure much higher prices
for prices for everyone.

4. The kinked demand curve, used by Paul Sweezy, explained the observed
rigidity of price in an oligopoly market.

5. The demand curve faced by any individual seller has a kink at the initial
price-quantity combination. The kinked shape of the demand curve is based on
the assumption that the competitors react differently to a rise in price or to a fall
in price.

1.5 QUESTIONS

1. Explain oligopoly market in detail.

2. Explain Cournot‘s model. Give its significance.
3. Critically examine the Cournot‘s model.
4. Discuss in detail the concept of Kinked demand curve.
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