Formulation
The two seminal papers on kinked demand were written nearly simultaneously in 1939 on both sides of the Atlantic. Paul Sweezy of Harvard College published "Demand Under Conditions of Oligopoly." Sweezy argued that an ordinary demand curve does not apply to oligopoly markets and promotes a kinked demand curve.
From Queen's College in Oxford, Robert Lowe Hall and Charles J. Hitch wrote "Price Theory and Business Behavior," presenting similar ideas but including more rigorous empirical testing, including a business survey of 39 respondents in the manufacturing industry.
Hall and Hitch further present a hypothesis for the initial setting of prices; this explains why the "kink" in the curve is located where it is. They base this on a notion of "full cost" - marginal cost of each unit plus a percent of overhead costs or fixed costs with an additional percent added for profit. They emphasize the importance of industry tradition in history in determining this initial price, noting further, "An overwhelming majority of the entrepreneurs thought that a price based on full average cost…was the ‘right’ price, the one which ‘ought’ to be charged."
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Famous quotes containing the word formulation:
“Art is an experience, not the formulation of a problem.”
—Lindsay Anderson (b. 1923)
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—Variously Ascribed.
The formulation was used as a motto by the English Nonconformist clergyman Richard Baxter (1615-1691)
“You do not mean by mystery what a Catholic does. You mean an interesting uncertainty: the uncertainty ceasing interest ceases also.... But a Catholic by mystery means an incomprehensible certainty: without certainty, without formulation there is no interest;... the clearer the formulation the greater the interest.”
—Gerard Manley Hopkins (1844–1889)