The Kinked-shaped revenue curve of a firm relates to which one type of the market structure?
Oligopoly
Understanding the Kinked Revenue Curve and Market Structures
The question asks about the specific market structure that is typically associated with a kinked-shaped revenue curve. This type of curve, often discussed as the kinked demand curve, is a model used to explain price rigidity in certain markets.
What is the Kinked Demand/Revenue Curve?
The kinked demand curve theory suggests that competing firms in an oligopoly market face a demand curve that is not smooth but has a 'kink' at the current market price. This kink arises from the assumed reactions of rival firms to price changes:
- If a firm raises its price above the current market price, its rivals are assumed not to follow the price increase. As a result, the firm will lose a significant number of customers to its competitors, making the demand curve relatively elastic above the kink.
- If a firm lowers its price below the current market price, its rivals are assumed to follow the price decrease to avoid losing their market share. This means that the firm will gain only a small increase in sales, as other firms also lower prices, making the demand curve relatively inelastic below the kink.
Because revenue is directly related to the demand curve (Total Revenue = Price x Quantity Demanded), the shape of the demand curve directly influences the shape of the revenue curves (Total Revenue, Average Revenue, and Marginal Revenue). The kink in the demand curve leads to a discontinuity in the marginal revenue curve.
Analyzing Market Structures and Their Revenue Curves
Let's consider the typical revenue curves for the market structures listed in the options:
Perfect Competition
In perfect competition, firms are price takers. The demand curve for an individual firm is perfectly elastic (horizontal) at the market price. The Average Revenue (AR) and Marginal Revenue (MR) curves are identical to the demand curve and are also horizontal lines.
Oligopoly
Oligopoly is a market structure characterized by a small number of large firms that are interdependent. The actions of one firm significantly impact the others. The kinked demand curve model is specifically designed to describe the behavior of firms in some types of oligopoly, leading to the characteristic kinked demand and, consequently, kinked revenue curves.
Monopoly
A monopoly is a market structure where a single firm controls the entire market. The monopolist faces the market demand curve, which is typically downward-sloping. The Average Revenue (AR) curve is the same as the demand curve, and the Marginal Revenue (MR) curve is below the AR curve and has twice the slope.
Monopolistic Competition
Monopolistic competition is a market structure with many firms selling differentiated products. Each firm faces a downward-sloping demand curve, but it is generally more elastic than that of a monopolist due to the availability of close substitutes. The AR curve is the demand curve, and the MR curve is below it, similar to a monopoly, but generally flatter due to higher elasticity.
Why the Kinked Curve Belongs to Oligopoly
The core assumption behind the kinked demand/revenue curve is the interdependent decision-making among a few dominant firms. This interdependence is the defining characteristic of oligopoly. The model explains why prices in an oligopoly might be stable, or "rigid," even when costs change, because firms are hesitant to change prices due to the asymmetric reactions of their rivals.
Therefore, the kinked-shaped revenue curve (derived from the kinked demand curve) is a concept directly related to the specific behavior and interdependence found in an oligopoly market structure.
| Market Structure | Number of Firms | Product | Demand Curve for Firm | Revenue Curves (AR, MR) |
|---|---|---|---|---|
| Perfect Competition | Many | Homogeneous | Perfectly Elastic (Horizontal) | AR = MR = Demand Curve (Horizontal) |
| Oligopoly | Few | Homogeneous or Differentiated | Can be Kinked | Derived from Demand (MR is discontinuous) |
| Monopoly | One | Unique | Downward Sloping (Market Demand) | AR = Demand, MR below AR |
| Monopolistic Competition | Many | Differentiated | Downward Sloping (relatively elastic) | AR = Demand, MR below AR |
Revision Table: Market Structure Concepts
| Characteristic | Perfect Competition | Oligopoly | Monopoly | Monopolistic Competition |
|---|---|---|---|---|
| Entry Barriers | None | High | Very High | Low |
| Price Control | None (Price Taker) | Some (Interdependent) | High | Some (due to differentiation) |
| Non-Price Competition | None | Significant (advertising, branding) | Little to None | Significant (advertising, branding) |
Additional Information: Kinked Demand Curve Assumptions
The kinked demand curve model, developed by Paul Sweezy, rests on specific assumptions about rival behavior in an oligopoly:
- Rivals will match price cuts but not price increases.
- This asymmetric response leads to the kink at the current price level.
- The discontinuity in the marginal revenue curve implies that marginal costs can fluctuate within a certain range without changing the profit-maximizing price and output, thus explaining price rigidity.
While a useful tool for understanding price rigidity in some oligopolies, the model has limitations, such as not explaining how the initial price level is determined.
Important Questions from Capital Market
The following two statements relate to receivables management. Choose the correct code for the statements being correct or incorrect.
Statement I: The major controllable decision variables for deciding the credit policy are the credit standards and analysis and the credit terms only.
Statement II : Factoring is a popular mechanism of managing, financing and collecting receivables.
The following two statements relate to financial derivatives. Choose the correct code for the statements being correct or incorrect.
Statement I: When an option is allowed to be exercised only on the maturity date, it is called an American option.
Statement II : If the option holder does not lose or gain whether he exercises his option or buys or sells the asset from the market, the option is said to be at-the-money.
The given statements are related to financial derivatives. Choose the correct code for the statements being correct or incorrect.
Statement I: A speculator will gain, if he sells foreign currency under a forward contract, when the spot price is higher than the forward price.
Statement II : In currency futures, intra currency spread exists when a speculator buys/sells the same currency for two delivery dates.
Indicate the correct code for the following two statements of Assertion (A) and Reasoning (R):
Assertion (A): Investors in the capital market now have a higher inclination for investment in debentures.
Reasoning (R): Debentures have active secondary markets now.
Authorised capital of a company is Rs. 5 lacs; 40% of it is paid up. Loss incurred during the year is Rs. 50,000. Accumulated loss carried from last year is Rs. 2 lac. The company has a Tangible Net Worth of:
