Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

Figure 1.3 
 
It is clear from figure 1.3, that if there is a kink in the 
demand curve, then the corresponding MR curve will be 
discontinuous. dA portion of the MR curve corresponds to the dE 
portion of the demand curve, while BMR portion of the MR curve 
corresponds to the ED portion of the demand curve. The length of 
the discontinuity is equal to AB. The point E, on the demand curve 
indicates two elasticities of demand namely, point E is a point on 
the demand curve dd and the same point E gives another 
elasticity of demand on DD curve. 
The greater the difference between the two elasticities of 
demand, the greater will be the length of the discontinuity because 
MR = Price (1 - 1/e). Thus, at the point P, both the demand curves 
DD and dd have the same output level. The MR will therefore be 
different because of differences in the elasticities of demand. Only 
when the elasticities are equal at point P, the discontinuous range 
also disappears. 
Suppose the MC curve of the firm passes through the 
discontinuous range of the MR curve, and then MR will not be 
equal to the MC at the equilibrium implying that equality between 
MR and MC is not possible and MR cannot be less than MC. In 
this situation, the price and quantity remain same, at the kink 
point. Even if the MC curve shifts but passes through the 
discontinuous range AB, the price-quantity combination will 
remain constant. The price-quantity combination given by the 
point of the kink remains more or less stable in the oligopoly 
market. The price rise or the price fall is not profitable for a single 
seller because of the asymmetrical behavior of sellers for a price 
rise or a price decrease. 

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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