Answer to Question #131989 in Macroeconomics for Sme

Question

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

Answer 1

Solution:

The kinked demand curve theory of an oligopoly occurs when the demand curve is not a straight line and shows a different elasticity for lower and higher prices. As such, prices in an oligopoly market are rigid, and that firms will face different effects for both decreasing or increasing prices. Rival firms will behave differently to price reductions and increases, resulting in a kink in the demand curve.

A contemporary oligopoly is a kind of market that consists of few select companies having a significant influence over a specific industry. Barriers of entry exist in an oligopoly market, and since there are few sellers in the market, every seller influences the actions of the other firms and vice versa.