Key Diagrams - The Kinked Demand Curve (Oligopoly)

In this revision video we walk through the analysis diagram for the kinked demand curve in an oligopoly.

The Kinked Demand curve is one analytical approach that you can use when thinking about interdependent decision-making by businesses within an oligopoly.

Interdependence means that a firm must consider the likely reactions of existing competitors to a change in their prices of forms of non-price competition such as marketing and advertising spend.

One of the implications of the kinkeddemand curve model is that firms within anoligopoly may be reluctant to change pricesonce they have settled at a certain level. Wecall this “sticky prices”. They focus insteadon non-price competition as a way of growing and then protecting their market share and existing supernormal profits.