Question

Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different products? Explain your reasoning.

Short answer

• The kinked demand curve would be more dramatic if each business in the cartel produced a near-identical commodity, such as OPEC and petroleum.
• If each firm produces a somewhat different products, the kinked demand curve would less extreme.

Step-by-step solution

Step 1. Assumption of kinked demand curve in oligopoly

An oligopoly firm faces a demand curve with a kink at the price level, with the curve being more elastic over the kink and less elastic below it.

Step 2. Reason for more extreme kinked demand curve

The kinked demand curve would be more extreme if the firms in the crtel were producing goods that were close substitutes. This is because in case of a price changes, the consumers can easily move to the firm selling at a lower cost.

Step 3. Reason for less extreme kinked demand curve

If each firm produces somewhat different products, then consumers may not easily shift to the other product because of the differentiation and angle of the kink will be less.