The Kinked Demand Curve – The Demand for Labour

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.