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8.7: Marginal Revenue Gap
Opening the book…
Since the kinked demand curve is really a composite of two separate demand curves this model must contend with two marginal revenue curves. Also, since only portions of each demand curve are relevant, this means that only portions of each marginal revenue curve are relevant. See figure 17.
Figure 17
There is a gap in an oligopolist’s marginal revenue (MR) curve.
Marginal revenue – The change in total revenue that results from a one-unit increase in the quantity sold.
To better understand, visually, the MR gap, look at figure 14.
Figure 18
This unique MR curve can be used to illustrate why price and output tends to be more stable in an oligopolistic market structure. Recall the profit maximization rule modules 5-6. A firm will maximize profits if it produces a rate of output when the last unit produced has a marginal revenue equal to its marginal cost (MR = MC). If firms in both perfectly competitive and monopoly market structures experienced any change in marginal cost, they would adjust their price and/or output. This is not necessarily the case for firms in an oligopoly.
Cost Cushion
As a result of this gap, modest shifts of the cost curve will have no impact on the production decision of an oligopolist. See figure 19.
