The kinked demand curve is observed in oligopoly markets. Oligopoly refers to a market structure where there are only a few large firms that dominate the market. These firms have a significant influence on the market price and output levels.

Explanation:

1. Oligopoly Market Structure:
- Oligopoly markets are characterized by a small number of large firms that dominate the market.
- These firms have a significant market share and often compete with each other to gain a competitive advantage.
- Due to the interdependence among firms, the actions of one firm can have a direct impact on the others.

2. Kinked Demand Curve:
- The kinked demand curve theory suggests that in an oligopoly market, firms face a demand curve that is kinked or discontinuous at the current market price.
- The kink in the demand curve occurs because firms assume that if they increase their price, other firms will not follow suit, resulting in a significant loss of market share.
- On the other hand, if a firm decreases its price, other firms are likely to match the price decrease, resulting in a smaller increase in market share.
- This creates a situation where the demand curve is relatively elastic above the current price level and relatively inelastic below the current price level.

3. Explanation of the Kinked Demand Curve Theory:
- The kinked demand curve theory is based on the assumption of price rigidity in oligopoly markets.
- Firms in oligopoly markets are often hesitant to change their prices due to the fear of retaliation from competitors.
- This leads to a situation where firms prefer to maintain the status quo and keep their prices stable.
- As a result, the demand curve is relatively elastic above the current price level because firms anticipate losing a significant market share if they increase their price.
- Similarly, the demand curve is relatively inelastic below the current price level because firms assume that competitors will match any price decrease, resulting in a smaller increase in market share.

Conclusion:

The kinked demand curve theory is observed in oligopoly markets where a few large firms dominate the market. The theory suggests that the demand curve is kinked or discontinuous at the current market price due to the interdependence among firms and their reluctance to change prices. This theory helps explain the price rigidity often observed in oligopoly markets.

Tankaperumal@gmail.comt