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The Kinked Demand Curve – The Demand for Labour

Published online by Cambridge University Press:  17 August 2016

David A. Peel
David A. Peel*
Affiliation:
University of Liverpool
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Abstract

In this paper the implications of Sweezy [1] and Efroymson’s [2,3] postulates concerning the shape of the demand curve in non-collusive oligopolistic industries are considered. On the basis of the analysis it is suggested that previous tests of the kinked demand curve hypothesis are invalid. Finally, we consider the implications of the product market analysis for the demand for labour and hence wage rate determination. It is concluded that for the industry considered, (the motor car industry), there is evidence that firms behave as though they face a kinked demand curve.

In 1939 P.M. Sweezy first postulated the existence of a kink in the demand curve facing the firm in non-collusive oligopolistic industries. Later, Efroymson extended the analysis suggesting that the shape of the kink would change through the trade cycle for different levels of capacity utilization. For purposes of exposition we will use the analysis developed by Chamberlain [4]. It is recalled that the firm perceives the intersection of two demand curves, its own (dd) which represents the demand schedule facing the firm if changes in its price are not matched by competitors, and the industry (DD), which does not represent the demand for the industry output as such, but rather the “market share” of one firm when other firms match price changes made by that firm.

Type
Research Article
Information
Recherches Économiques de Louvain/ Louvain Economic Review , Volume 38 , Issue 3 , September 1972 , pp. 267 - 274
Copyright
Copyright © Université catholique de Louvain, Institut de recherches économiques et sociales 1972 

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References

[1] Sweezy, P.M., Demand under Conditions of Oligopoly, Journal of Political Economy, 47, 1939, pp. 568–73.Google Scholar
[2] Efroymson, C.W., A Note on Kinked Demand Curves, American Economic Review, Vol XXXIV, March 1943, pp. 98–109.Google Scholar
[3] Efroymson, C.W., The Kinked Oligopoly Curve Reconsidered, Quarterly Journal of Economics, February 1955, esp. pp. 121–122.Google Scholar
[4] Chamberlain, E.H., The Theory of Monopolistic Competition. Cambridge, Harvard University Press, 1933.Google Scholar
[5] Stigler, G.J., The Kinky Oligopoly Demand Curve and Rigid Prices, Journal of Political Economy, Vol LV., Nos 5, Oct. 1947, pp. 432–47.Google Scholar
[6] Cowling, K. and Cubbin, J., Price Formation in the U.K. Motor Industry : An Analysis of Oligopolistic Behaviour, University of Warwick Research Paper, n° 9.Google Scholar
[7] Mikesell, R.R., Oligopoly and the Short Run Demand for Labour, Quarterly Journal of Economics, Vol. 55, November 1940, pp. 161–66.Google Scholar
[8] Dunlop, J.T., Wage Determination under Trade Unions. New York, Macmillan 1944.Google Scholar