What is the kinked demand curve model of oligopoly?
The kinked demand curve model assumes that a business might face a dual demand curve for its product based on the likely reactions of other firms to a change in its price or another variable
What are the assumptions of likely behaviour of firms in this model?
The Kinked Demand Curve Analysis Diagram
Is there a stable profit maximising equilibrium in this model?
The kinked demand curve model makes a prediction that a business might reach a stable profit-maximising equilibrium at price P1 and output Q1 and have little incentive to alter prices.
Recent examples of price wars include the major UK supermarkets, price discounting of computers in China and a price war between cross channel speed ferry services. Price competition is frequently seen in the telecommunications industry.
Changes in costs using the kinked demand curve analysis