The Kinked Demand Curve
Analysis of Oligopoly
Written by Professor Gavin Reid, of the Department of Economics, University of St. Andrews
‘Discusses the literature which is directly addressed to the
kinked demand curve, the origins, the theory.., and the empirical tests. The treatment is
sophisticated.’
George Stigler, University of Chicago
Book review by Mark Blaug
I argued in
The Methodology of Economics (1980)
that the root cause of the present ‘crisis’ in economics is the
failure of economists to practice the methodology of falsificationism
which they invariably preach, and I provided a series of case studies of particular
economic theories to support my contention. Had I known of this book, the
theory of the kinked oligopoly demand curve would have become another case in
point.
The book
under review is divided into three sections: the genesis of the theory of the
kinked demand curve; the analytics of the kinked demand curve (where the author
breaks new ground in an elegant exposition of the geometry and algebra of the
argument); and the empirical evidence for and against the notion of kinks in
the demand curve of both firms and industries under oligopoly.
….I
can think of no more instructive example of the perennial problem of testing
economic theories than this one: time and time again, it is not at all self–evident
what is actually being predicted by reigning economic theories, or what are the
appropriate operational counterparts of the variables being predicted…Doubly
kinked demand curves have been explored, leading towards the theory of
‘contingent demand functions’ that may have kinks, gaps and cusps,
depending on the capacity limitations of rival firms, the degree of product
differentiation, the reactions speed of buyers, the quality of market
information etc. ..
We are left
at the end of this well told story with the author’s pointed conclusion:
‘If the kinked demand curve is to merit the continuous attention it
receives in the training of economists, there is a strong need for a great deal
more empirical examination to be applied to it.’
Mark Blaug, Economica, 1982.