Q:

What is meant by the kinked oligopoly demand curve?

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Quick Answer

The kinked Oligopoly Demand curve refers to a demand curve with two different segments having two distinct rates of elasticity that join to form a kink. The kinked-demand curve helps to explain the rigidity in Oligopoly price. The kinked-Oligopoly demand curve consists of a more elastic segment showing price increases and a less elastic segment showing price decreases.

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Full Answer

The Oligopoly demand curve comprises of two segments with a relative rate of elasticity based on the independent decision-making of oligopolistic companies. The demand curve indicates that firms have a belief that if they make any change in prices of their products, all other competitors will also change their prices. For instance, if they increase their prices then their competitors will also increase and vice-versa.

Oligopolistic firms face downward sloping demand curves, but the elasticity depends on how the competitors react to price and output changes. If competitors refuse to follow a price increase by one company, the demand becomes relatively elastic. If such a firm raises its prices, its total revenue falls. However, if rivals match the price reduction of one business to avoid losing market share, the demand becomes more inelastic. In such a scenario, a fall in price leads to a decline in total revenue.

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