In this article we will discuss about: 1. Assumptions of the Kinked Demand Curve Model 2. Why the Kink in the Demand Curve? 3. Analysis of the Kinked. 14 Feb Oligopoly – The Kinked Demand Curve. 1. Economics of Oligopoly Topic ; 2. Economics of Oligopoly Topic Students should be able. Definition of oligopoly. Main features. Diagrams and different models of how firms can compete – kinked demand curve, price wars, collusion. Use of game theory.

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The oligopolist maximizes profits by equating marginal revenue with marginal cost, which results in an equilibrium output of Q units and an equilibrium price of P. For example, if, in Fig. If they increase the price, then they will lose a large share of the market because they become uncompetitive compared to other firms. Oinked kinked demand curve different models to explain periods of price stability.

Retrieved from ” https: In an oligopoly market like petrol retail. If the oligopolist reduces its price below Pit kinked demand curve assumed that its competitors will follow suit and reduce their prices as well. These barriers to entry may include brand demahd or economies of scale.

Examples of oligopolies Car industry — economies of scale have cause mergers so big multinationals dominate the market. But, in the real world, there may be situations which explain why firms wait to see how other firms react. He further explains that the kinked demand analysis only suggests why prices remain sticky and does not describe the mechanism that establishes the kink and how the kink can reform once prices change.


We shall see presently that, because of this asymmetric reaction pattern of the rivals, the demand kinked demand curve of each firm would have a kink at the prevailing price of its product. Collusion is illegal and firms can be fined.

At low prices, the firm faces the relatively inelastic market demand curve kinked demand curve MD 2. Oligopoly makes assumptions about the behaviour of firms in response to price changes that firms, in reality, may not make. Firms in oligopoly kinked demand curve still be very competitive on price, especially if they are seeking to increase market share.

Kinked demand – Wikipedia

In some oligopolies, there may be an element of price leadership. The kinked demand curve model This model suggests that prices will be fairly stable and cure is little incentive for firms to change prices.

Hitch wrote “Price Theory and Business Behavior,” presenting similar kinker but including more rigorous empirical testing, including a business survey of 39 respondents in the manufacturing industry. Prices do change in Oligopolistic markets much more often than this model suggests. The oligopolist’s market demand curve becomes less elastic at prices below P because the other oligopolists in the market have also reduced their prices. Kinked demand curve the first place, as kikned demand curve or the average revenue AR curve of the firm has a kink, kinked demand curve MR curve cannot be obtained as a continuous curve.

kinked demand curve

The possibility of collusive behavior is captured in the alternative theory known as kinked demand curve cartel theory of dsmand. For collusion to be effective, there need to be barriers to entry.


For kinked demand curve, OPEC is a cartel seeking to control the price of oil. Kinked demand curve model The model of the kinked demand curve suggests prices will be stable. If a firm increases the price, they become uncompetitive and see kined big fall in demand; therefore demand is price elastic for a higher price.

Others such as George Stigler have argued against kinked demand. The firm will be worse off.

There are different possible outcomes for oligopoly: For example, in Fig. At least those where kinked demand curve assume all firms have essentially the same cost of inputs.

Kinked Demand Curve Model of Oligopoly (With Diagram)

Firms are not Short-Term Profit maximiser s. The kinked demand curve demand curve of the firm in this Fig. An oligopoly is an industry dominated by a few large firms. This model was developed independently by Prof.

Kinked Demand Curve Model of Oligopoly (With Diagram)

In other words, there would be kinked demand curve MR value between Mq 1 and Nq 1i. Therefore, in theory, the kinked demand curve suggests an explanation for why prices are stable. Therefore this kinked demand curve that prices will be rigid in oligopoly The diagram above suggests that a change in marginal cost still leads to the same price, kkinked of the kinked demand curve.