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3.4.4 Oligopoly - The Kinked Demand Curve (Edexcel A-Level Economics Teaching PowerPoint)


Last updated 23 Sept 2023

This PowerPoint covers non-collusive oligopoly and the kinked demand curve model.

The kinked demand curve model is a theory used to explain price rigidity and stability in oligopoly markets, particularly when there are only a few dominant firms. In this model:

  1. The demand curve facing an oligopolistic firm has a kink at the current market price.
  2. Above the kink, the demand is highly elastic, meaning consumers are very responsive to price changes. Firms recognize that if they increase their prices, consumers will quickly switch to competitors, causing a sharp drop in their sales.
  3. Below the kink, the demand is inelastic, meaning consumers are less responsive to price changes. If a firm lowers its price, it may not gain many additional customers, as competitors are likely to match the price cut.
  4. Firms assume that their competitors will match any price decrease but not necessarily match price increases. Therefore, they are hesitant to raise prices above the kink, as it may lead to a significant loss of market share.

Overall, the kinked demand curve model suggests that in oligopoly, firms tend to maintain prices near the existing market price due to the fear of retaliation from competitors. This can lead to price stability and a situation where small changes in costs or demand may not result in corresponding price adjustments. However, it's worth noting that this model is a simplified representation of oligopoly behavior and has its limitations in describing real-world market dynamics.

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