Econ 111 Assingment

In an oligopoly market, there are a small number of firms that dominate the industry and each
firm is aware of the actions and reactions of its competitors. This interdependence between
firms leads to a distinctive feature of oligopoly markets known as the kinked demand curve.
The kinked demand curve can be represented graphically as follows:
[Insert diagram of kinked demand curve]
The kinked demand curve has two segments: a downward-sloping segment and an upward-
sloping segment. The downward-sloping segment represents the market demand curve facing
a firm when its competitors do not follow its price change. The upward-sloping segment
represents the market demand curve facing a firm when its competitors follow its price
change.
The downward-sloping segment is relatively flat, which means that a small change in price will
have a small effect on the quantity demanded. This is because consumers are unlikely to switch
to a competitor's product just because the price of the original firm's product increases slightly.
However, if the original firm were to significantly increase its price, consumers would be more
likely to switch to a competitor's product, leading to a larger decrease in the quantity
demanded.
The upward-sloping segment is steeper, which means that a small change in price will have a
larger effect on the quantity demanded. This is because if the original firm decreases its price,
its competitors will likely follow suit in order to remain competitive. As a result, the quantity
demanded for the original firm's product will increase significantly. However, if the original firm
were to significantly increase its price, its competitors would not follow suit and the quantity
demanded for the original firm's product would decrease significantly.
Overall, the kinked demand curve reflects the interdependence between firms in an oligopoly
market. Firms must carefully consider the reactions of their competitors when setting their
prices, as a small change in price can have a large effect on the quantity demanded.
In an oligopolistic market, there are a small number of firms that dominate the industry and
produce similar or identical products. These firms are interdependent, meaning that each firm
takes into account the actions and reactions of its competitors when making pricing decisions.
One way to illustrate this interdependence is through the concept of a kinked demand curve.
The kinked demand curve model suggests that the demand curve for an oligopolistic firm's
product is not a smooth, downward-sloping curve like it is in a perfectly competitive market.
Instead, it has a "kink" or discontinuity at the existing market price.
The reasoning behind this is as follows:
If a firm raises its price above the market price, it will lose market share to its competitors, who
will not raise their prices and will therefore be more competitive. As a result, the demand for
the firm's product will decrease significantly.
If a firm lowers its price below the market price, it will attract more customers, but it will also
invite retaliation from its competitors, who will also lower their prices to remain competitive.
This will lead to a decrease in overall industry profits, as the firms will be selling more units at a
lower price. Therefore, the demand for the firm's product will increase only slightly.
If a firm keeps its price at the market price, it will not lose or gain market share, as its price is
already in line with its competitors. Therefore, the demand for the firm's product will remain
relatively unchanged.
The kinked demand curve model helps to explain why oligopolistic firms are often hesitant to
deviate from the existing market price, as any significant change in price could lead to a
significant change in demand. It also helps to explain why prices in oligopolistic markets may
be relatively stable, as firms are reluctant to engage in price wars that could lead to a decrease
in industry profits.
Here is a diagram illustrating the kinked demand curve for an oligopolistic firm:
[Insert diagram here]
In the diagram, the kink in the demand curve occurs at the existing market price, P*. The curve
to the left of P* represents the elastic portion of the demand curve, where a small change in
price leads to a significant change in demand. The curve to the right of P* represents the
inelastic portion of the demand curve, where a small change in price leads to a small change in demand.

Econ 111 Assingment

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In an oligopoly market, there are a small number of firms that dominate the industry and each

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