Oligopoly and Demand Curve

Oligopoly refers to a market structure where a few large firms dominate the market. These firms have considerable market power and they can influence the market price by changing their output levels. The demand curve for an oligopoly market is different from that of a perfectly competitive market or a monopoly market.

Kinked Demand Curve

The demand curve for an oligopoly market is often referred to as a kinked demand curve. The kinked demand curve is a graph that shows the market demand for a product in an oligopoly market. The curve has a kink at the current price level, which indicates that the demand for the product is relatively elastic above the current price and relatively inelastic below the current price.

The kinked demand curve is based on the assumption that firms in an oligopoly market are interdependent. This means that the actions of one firm will have an impact on the actions of other firms in the market. If a firm raises its price, other firms in the market may not follow suit, and the firm may lose market share. On the other hand, if a firm lowers its price, other firms in the market may follow suit, and the firm may not gain a significant market share.

Implications of Kinked Demand Curve

The kinked demand curve has several important implications for firms in an oligopoly market. Some of these implications are:

1. Price Stability: The kinked demand curve implies that firms in an oligopoly market will tend to keep their prices stable. This is because raising or lowering prices may not result in a significant increase or decrease in demand.

2. Non-price Competition: Firms in an oligopoly market will engage in non-price competition, such as advertising, product differentiation, and customer service, to gain market share.

3. Collusion: Firms in an oligopoly market may collude to set prices and output levels. Collusion can be illegal, and firms may face legal consequences if caught colluding.

Conclusion

In conclusion, the demand curve for an oligopoly market is a kinked demand curve. The kinked demand curve is based on the assumption that firms in an oligopoly market are interdependent. The kinked demand curve has several important implications for firms in an oligopoly market, including price stability, non-price competition, and the possibility of collusion.