merged

What if there is a change in marginal cost? Notice on the graph in Example 7C below that a
shift in the marginal cost curve (from MC 1 to MC 2 ) may have no effect on price or quantity. As
long as the marginal cost curve passes through the gap in the marginal revenue curve, an
oligopoly will continue to produce the same quantity at the same price. Thus, the kinked
demand curve theory predicts “sticky” prices for an oligopoly.
Example 7C: A change in marginal cost may result in no change in price or quantity.
$13 -
12 -
11 -
10 -
Price 9-
8-
7-
6-
5-
Z
0
0 1 2 3 4 5 6 7 8 9
Quantity
MR
D = P
2. Unkinked demand curve theory. Research by economist George Stigler cast doubt on the
kinked demand curve theory. Stigler’s research disputed the fundamental assumption that
oligopolists match price decreases but do not match price increases. If this assumption is
incorrect, then there is no kink in the demand curve, no gap in the marginal revenue curve,
and no “sticky” prices. Thus, according to unkinked demand curve theory, oligopoly is similar
to monopolistic competition.
3. Cartel theory. A cartel is an organization through which members jointly make decisions
about prices and production. Competing firms can benefit from forming a cartel. A cartel sets
output for the industry, as would a monopoly. Industry output will be reduced by the cartel,
price will be increased, and industry profits will be increased.
Example 8: In the 1950s, General Electric, Westinghouse, and other firms maintained a cartel
agreement in selling heavy electrical equipment to the government. The cartel members
determined the firm to enter the “low” bid based on the phases of the moon. Research estimated
the cost of the cartel to consumers as about $175 million per year.
After setting output for the industry, the cartel allocates production to member firms. This may
be difficult, as each member of the cartel would like to increase production (in response to the
higher cartel price), but industry production must be decreased (to achieve the higher cartel
price).
In America, most cartel agreements would be illegal as a violation of antitrust law. Even if the
cartel is legal, it will still prove difficult to maintain, for two reasons:
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(1) Noncartel competition. If the cartel successfully sets a production level for the industry
that yields high profits, those high profits will tend to attract new firms to the industry. This
noncartel competition will drive the industry price back down.
MC
MC
1
2
Monopolistic Competition and Oligopoly 23 - 6