Question

Explain the kinked demand curve theory of an oligopoly. Include in your answer a discussion of a contemporary oligopoly.

Answer 1

A kinked demand curve occurs when the demand curve is not a straight line but has a different elasticity for higher and lower prices.

One example of a kinked demand curve is the model for an oligopoly. This model of oligopoly suggests that prices are rigid and that firms will face different effects for both increasing price or decreasing price. The kink in the demand curve occurs because rival firms will behave differently to price cuts and price increases.