Kinked Demand Curve in Oligopoly Market
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priceincomplete pricing analysis.
In an oligopoly market, firms often face a kinked demand curve. This occurs when a firm's competitors react strongly to any price changes it makes, but do not react as strongly to changes in its output or other non-price factors.
The kinked demand curve is illustrated in the diagram below:
The demand curve (DD) is kinked at the current price and output level (P1, Q1). The firm faces a relatively elastic demand curve (DE) above the current price, as competitors will likely match any price decreases. However, the firm faces a relatively inelastic demand curve (DF) below the current price, as competitors are unlikely to match any price increases.
This means that if the firm raises its price, it will lose a significant amount of market share to its competitors. However, if it lowers its price, its competitors are likely to follow suit, resulting in a smaller increase in market share.
Therefore, the firm may choose to maintain its current price and output level, as any deviation from this may result in a loss of market share and lower profits. This can lead to price stability in the oligopoly market, as firms are hesitant to make any significant price changes.
Overall, the kinked demand curve in an oligopoly market reflects the interdependence between firms and the strategic decisions they make in response to each other's actions.
The kinked demand curve is illustrated in the diagram below:
The demand curve (DD) is kinked at the current price and output level (P1, Q1). The firm faces a relatively elastic demand curve (DE) above the current price, as competitors will likely match any price decreases. However, the firm faces a relatively inelastic demand curve (DF) below the current price, as competitors are unlikely to match any price increases.
This means that if the firm raises its price, it will lose a significant amount of market share to its competitors. However, if it lowers its price, its competitors are likely to follow suit, resulting in a smaller increase in market share.
Therefore, the firm may choose to maintain its current price and output level, as any deviation from this may result in a loss of market share and lower profits. This can lead to price stability in the oligopoly market, as firms are hesitant to make any significant price changes.
Overall, the kinked demand curve in an oligopoly market reflects the interdependence between firms and the strategic decisions they make in response to each other's actions.
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