Economics Oligopoly Questions
The kinked demand curve model in oligopoly is a theory that explains the behavior of firms in an oligopolistic market. It suggests that firms face a demand curve with a kink at the current market price. The model assumes that if a firm increases its price, other firms will not follow suit, resulting in a significant loss of market share for the price-increasing firm. However, if a firm decreases its price, other firms are likely to match the price reduction, leading to no significant gain in market share for the price-decreasing firm. This asymmetry in price adjustments creates a kink in the demand curve, indicating that firms are more likely to maintain their current price rather than change it.